Chapter 25 – The Second Meeting at the Factory’s Conference Room; Attendees and Discussion Points

After a delightful lunch you need to use the remaining time at the factory for a second meeting. You have actually finished your factory evaluation at this stage and need to discuss your findings with the factory’s management before you leave.

Who Attends?

Theoretically, you could leave right now but the factory management expects to hear your opinions and advice. It is in your interest to tell them about both any shortcomings you found and your positive findings during the tour of their factory.

The meeting will likely be attended by the factory owner, the QC Manager, and engineers if there are technical issue involved. The sales manager and his assistants will naturally attend. In fact, the factory owner may decide to call some other managers in for the meeting only when the discussion focuses on their areas.

The factory will not stop just because some of the managers are having a meeting with you. Meetings take place routinely; everything should continue to run smoothly.

Following are key discussion points you should addressed during the meeting:

Delivery Time and Order Backlog

You need to ask the factory management about their delivery time during the low and peak seasons so that you have information about how long it will take for your goods to ship. This is also important to understanding what lead time is needed when placing purchase orders.

Something else that needs to be asked is their present order backlog. This indicates how well the factory is doing. If they do not have many orders, there may be a reason for it, which can be important in your decision making. If the factory won’t talk about a low order backlog, there is a chance that their competitor knows which proves one more time how important it is to visit the factories in person.

You may have already received an impression about backlog during your visit to the different factory areas. Little material in the incoming area means they don’t have much backlog. A large amount of incoming material means a lot of backlog.

Port of Loading

Since factories sometimes can use different ports of loading, you need to inquire which one is usually used because the applicable freight charges will apply and you need that information to properly calculate your landed cost. Some ports have only one vessel departing per week and you must know this in advance when planning tightly scheduled shipments.

Closest International Airport

I want to mention that some products can only be shipped by airfreight. Notebook computers and MP3 players are typical examples. The key components of these products are ICs that constantly fluctuate in price. At present, the prices are in constant decline. Buyers need to receive their goods within a short time or they will not be able to make a profit. The price they need to charge will be higher then the price being charged for goods that were air shipped. That makes air shipment unavoidable.

Banking Details

When discussing the payment terms with factory management, ask them for their banking details, which will allow you to do a background check before placing your orders with them.

Payment Terms

Finally, you need to negotiate the payment terms, which are usually by irrevocable letter of credit at sight (L/C). This is usually the safest way to pay the factory and also allows them to obtain loans from their bank to start the production on time.

Never ever let the factory convince you to remit a down payment of let’s say 20 or 30% of the total order volume by T/T to enable them to start your production. Ask yourself why are they asking for this? There is only one reason, which is that the factory has no money and obviously no other orders. They want you to jumpstart production with your cash. If something goes wrong and the likelihood is rather great something will, you will lose your money and never receive a shipment.

Check One More Time To Be Sure the Factory Clearly Understands Your Specifications

Most important is to make sure that factory management understands your specifications.

What sort of things do you need to specify? Have you included:

  • Labeling
  • Any special markings
  • Packaging including the quality of cardboard
  • Materials or components to be used
  • Types and colors of paints and finishes
  • Instructions in one language or several languages suitable for your clients? Instructions in Chinese don’t go over well in Europe or the USA.

Many importers use the Pantone Color Chart numbers to inform the factory about their color or color combination requirement. I can tell you from my experience that the results will not be very good. Especially if you have several factories involved which have to follow your color requirement.

It is much more practical and produces better results, when you use color chips instead. You can buy items which have the correct color in your home country and cut off some pieces of the plastic material. Always keep several reference samples for yourself and handover to each factory a piece that is a reasonable size. Reasonable does not mean a thumbnail sized one because it is not large enough for the factory to make the injection color accurately.

Also, consider the tests to be conducted during manufacturing and at completion. Do you need CE or ROHS approvals for importing electrical goods to Europe? If wood is contained in the product or the packing are fumigation certificates required?

Protect Yourself From Copyright Infringements

Does the factory or supplier own the intellectual property rights of the product? Do not believe you can import well known international brands unless you intend to buy them from the brand owner. Gucci, Samsung, Sony, or Philips or any owner of a well known brand certainly won’t allow a Chinese supplier to sell their branded products at low prices through the back door! China is probably the world’s largest source of fake or pirated goods with well known logos and branding that are simply copies or worse just a logo stuck on a similar looking product.

Not only will there be little or no warranty but worse you risk serious legal action and possibly a criminal conviction if you cannot show proof of ownership of the brand name or that an agreement exists with the brand owner when you import under a brand other than your own or the factory’s. Even if it is the factory’s brand you still need to have a written agreement with them to distribute it.

Please take this very seriously and do not even consider trying to import fake goods. It would destroy your reputation at home in addition to the possible legal proceedings. 

Discussing Your Purchase Order (P/O) Details

In China as anywhere else, people are highly regarded if they take definitive action. If you visit the same factory 5 times without placing an order, the factory will conclude that you are not sincere about purchasing from them. The consequence will be that decision makers will stop attending your meetings and you will not have anyone in attendance with the authority to negotiate. The attending staff will quote higher prices to discourage you from returning. 

During the second meeting the factory will request that you to send them a purchase Order and open your L/C. They will also request that you provide the detailed graphics for your packaging, your instruction manual, and your export carton.

If the graphics or artwork has not been finalized, the factory will include a clause in their proforma invoice (P/I), which is  their counterpart agreement to your purchase order, stating that the final delivery date will be only confirmed after all required documents have been received.

This probably will not be to your liking since you want a firm delivery schedule. However, it is an understandable action on the part of the factory. They cannot take the risk of producing the goods without having the packaging to protect them when they come off the conveyor belt.

It is however understandable, that the factory cannot start their production without having received the necessary packing material and that depends on the receipt of your artwork. Beside the possibility of damaging the goods, there is additional costs involved with handling the goods several extra times to store them, retrieve them from storage, and completing final packaging at a later date. Although some importers do make this request is really is not practical.

It will be helpful if you know something about how the factory plans their production schedule. Besides the limited capacity of the injection mold department there are a limited number of production lines that are allocated to customer projects several weeks ahead of time.

Before they can begin production, they must also procure raw materials and other components, which also takes time. Due to a wide spread shortage of raw materials, this process has changed over the last couple of years. Nowadays most factories have to pay for the raw materials upfront or upon delivery to their warehouse. “Guanxi” is dominate here. Without a good business relationship with their raw material vendors, factories may end up receiving the materials much later than anticipated. This means customer orders are not produced on time. If they are lucky and that indeed depends on “Guanxi”, they can pay for their raw materials and components in the traditional 30 days.

Based on that, you should realize that the factory’s cash flow depends on punctual payments from customers and their relationship with their bank. This bank relationship is often more important to their long term survival than any single new order. Keep this in mind when negotiating production start and completion dates.

You should also realize that the factory has the discretion of who gets their goods first. This is primarily an economic decision but a good relationship between the factory and your self can influence the decision. If you push too hard for lower prices, you will be allocated a later production slot but with this knowledge you can make the decision between price and schedule.

Using a sledgehammer approach to obtain better prices is not appreciated by the Chinese although they do not confront it openly. Remember that negotiating through all the details is the preferred approach.

When you issue the P/O to the factory, it is usually your last chance to negotiate prices. At this point, all of the information in the P/O needs to be final and all of the details included. Everything should be fully known by everyone and the final price agreed to.

Something else about Chinese business culture is that amending the P/O at a later stage demonstrates to the factory that your company was careless when originally issuing the P/O. They will conclude that dealing with your company is somewhat risky for them. Therefore, spend the time drafting your P/O to get it right before asking the factory to sign it. You should consider providing the factory a draft for them to review. This helps save time amending it later on.

What Should Be Included in a P/O?

This list summarizes what I suggest you include in your P/Os, regardless of the kind of products you are purchasing:

  • Clear and detailed product description including color, measurements, sizes etc.
  • Clear and detailed packaging information including barcodes and shipping marks
  • Order quantity
  • Delivery date
  • Port or airport of loading
  • Port or airport of landing
  • Price
  • Payment terms
  • Spare parts or spare units if any
  • Agreed defective rate
  • Guarantee clause
  • Indemnification clauses
  • Late delivery clause
  • Transshipment clause
  • Clause for compliance with requirements in your home country
  • Information whether goods must be inspected and if by whom
  • Clause that mass production must comply with the submitted and approved samples

However, do not overdo the P/O. I have seen some that read as if lawyers issued them. The factories do not have the time or money to employ lawyers for the sake of reviewing customers P/Os. Remember, this is all about partnership. If you are afraid that the factory will cheat you, then you have not conducted a thorough evaluation of the factory.

Here are other things to consider when writing your P/O.

  1. Order quantity – This should match the container loading capacity or the total quantity of all products if you are purchasing several different products from the same factory and plan to ship them in one container.
  2. Packaging information – This is very important because it is a cost to the factory and when not clearly spelled out they will use lower cost materials. For instance, there are several grades of corrugated cardboard that are measured in grams per square meter. If you did not specify the weight, you could end up with a 2-layer corrugated cardboard sheet that is so thin you can easily punch a hole through it with your fist. This quality is unacceptable because you can not stack sufficient cartons on top of each other. The barcode information is also very important because the inspector has to verify it during the inspection. If the barcode cannot be read by a barcode scanner properly, the product will not register at a hypermarket/supermarket checkout stand. Companies like Wal*Mart consider this a major defect and do not accept the goods.
  3. Spare parts or spare units – This depends on what kind of products you import. For technical products, you can negotiate 1 or 2% of free spare parts/spare units included in the buying price. The factory will of course calculate it. If these goods come without a guarantee or service agreement, you had better negotiate net prices.
  4. Defective rate – Putting a clause in your P/O will help protect any  compensation claim in case of epidemic defects or overall poor product performance. It splits responsibility between the factory and your company. Nobody can demand that production be completely without faults and defects. Therefore, it is fair enough to allow the factory a certain percentage of defects as an upper ceiling limit. You have to negotiate this and usually the factory will have some historic figures in mind. Everything exceeding this percentage will be the factory’s responsibility. You may say, I will employ a good inspection company, which will help me to protect my interests. That may be true but there is still a risk that something has been overlooked or a defect shows up later in time. You can imagine that this could become very expensive because there will be compensation claims from your customers or demands for price reductions.
  5. Guarantee clause – Most countries have laws protecting the end consumer’s rights and provide them with a guarantee period of anything between 1-2 years. In some cases, retailers even have extended this guarantee period by another year. Three years is a long time for some products with a limited life cycle. Because it is a legal requirement (except the additional year offered by retailers) you must comply and protect your interests by adding a clause in your P/O. This gives you the right to ask the factory for compensation. Most factories however will not accept these clauses and you may have to negotiate to find a way around it and still protect your company’s interest.
  6. Indemnification clauses – This is another important clause that helps you if you become entangled in copyright claims or patent infringement claims. Unfortunately, Chinese manufacturers have a different understanding of copyright and patent infringements from western societies. They think, if they copy a successful product and apply some design modifications, it is their own design and they even go so far as to have it registered at the Beijing Patent Registry under their company name. If you ask them, you will usually hear “No problem – it is our design and we have already registered it”. This will be of no help if the original designer sues you in your home country. Without an indemnification clause you would be in deep trouble and pay everything yourself.
  7. Late delivery clause – This is relatively easy to understand. If your goods cannot be shipped on time due to the factory’s fault, they will probably arrive too late for your customer’s promotion and that can become expensive as well. You have to be careful here because sometimes it can be your own fault because you failed to give the factory needed information, documents, or approval to start or finish production on time. I cannot provide exact figures because they vary from product to product and company to company but you should at least request the factory to use an express vessel at their cost to make up the lost time. In a worst-case scenario the factory should share or completely pay the compensation costs your customers negotiated with you. Some importers may even include a clause which asks the factory to ship goods by air but in all my years I have seen very few cases where this has really happened and usually factories will not agree to such a clause.
  8. Clause for compliance with requirements in your home country – This is another important clause because if the Government Authorities in your home country perform random checks at retail outlets, you may be in for a surprise when they find that the goods you supplied do not comply with local directives or laws. You should not assume that all factories are fully aware of all requirements in your home country. The opposite is mostly true. You, as the importer, are responsible to import only goods that comply with your countries laws and you must protect your company from damage for non-compliance by adding a clause in your P/O.
  9. Information whether goods must be inspected and by whom – This clause is easy. If you want the goods to be inspected, which I strongly recommend, then you have to inform the factory about the details.
  10. Information that mass production must comply with the submitted and approved samples. As already mentioned several times before, you set the quality standard by approving the samples and must enforce it now by not allowing the factory to produce anything else. If you are lenient in this request, your efforts evaluating the samples and factory will have been a waste of time. 

Your specific product requirements may deem other P/O clauses be included. For instance, the garment or textile industries differ from home appliances. In general, you are supposed to be the expert for your products and should have the knowledge to figure out any other needed clauses.

Please be aware that any P/O is only legally binding after an authorized factory representative signs it. Sometimes factories delay signing for quite some time. In that case, the best solution is calling the person in charge to ask what is going on. There could be a reason for the delay but the factory will try to change the delivery date. Therefore, act immediately rather than waiting in good faith.

Other than adding your specific terms, try to write P/Os that are easily understood and are no longer than 2-3 pages. Anything else becomes too complicated and requires too much effort on both sides to read and comprehend. You should be able to establish the P/O format one time and then copy and paste the contents for other products without starting from scratch.

Do not underestimate the importance of this section. If you make mistakes here, it usually will cost you money and respect.

It is a good idea to discuss your P/O content with the factory management during your visit. Trying to explain what you intended with a contract clause proves much more complicated once you are back home.

You can shorten this whole process by giving a copy of your standard P/O to management during the meeting or having it sent in advance if you are sure that you are going to work with the factory.

Ordering Samples

After making your decision about which factory to contract with, order your product samples but plan to evaluate them once you return home.

Sample preparation, depending which kind of products you want to import, can take considerable time. Contrary to what many people think, factories usually do not keep samples in their warehouse that can be sent right away. The more complicated a product is (for instance home appliances or consumer electronics products) the longer it will take and the more diligence needed from the factory side to prepare the samples according to your specific requirements.

You have reached a turning point in your own quality control. The first step was your scrutiny of each factory visited during the trip. You should have a good idea how each factory will perform and how talented their management is.

Providing them with detailed information about your sample requirements could become the key to your success. Why is this so important?

Imagine that you did not pay adequate attention to instructing the factory about your sample requirements and they prepare the sample according their own factory standards. As mentioned before, timing is important and you need the samples checked for compliance with your requirements in your home country. It needs to be right the first time.

If the first sample is incorrect, you could take a risk and place your order in hopes that the factory will get it right the second time. It is not a good idea to take the risk because there cannot be a guarantee that the factory will actually follow your new instructions.

It is best asking the factory to manufacture new samples. Time starts to become an issue as you wait for new samples to be made and it will take 3-7 days delivery time to ship them to your home country. Add everything up and you have possibly lost a month. This could be crucial if your goal is to be among the first to promote the new products in your home market.

Never place any order with new suppliers before you receive acceptable samples with the proper quality and they have been approved by your QC people or an authorized lab. Anything else is a gamble and you don’t want to begin production with that level of risk. Only after establishing a sound business relationship with your suppliers, can you be confident the factory will closely follow your instructions. It is important to set things right from the very beginning.

When asking for samples, be sure to request they be packaged according to your specifications. This should be the same packaging the end consumer receives. At this point, they should workout the details to determine how many pieces fit into one 20’ or 40’ ocean-going container. Along with this comes the details of how many fit into one export carton and if any inner packing needs to go into the export carton.

With this information, you can calculate the freight cost. It may be necessary to change the sales packaging size in order to fit more pieces into one container and save substantial freight charges. It makes a big difference if you can pack 1,400 coffeemakers in a 40’ container instead of only 1,200 pieces and it will certainly affect your selling price.

Samples are seldom free which is understandable because they are handmade and very labor intensive. Even if they are simple plastic products, the factory has to follow your instructions and injection mold  them in a certain color which is very time consuming because the plastic injection machines are usually running at full capacity and the injection is limited to one color at a time. If you ask for several different color samples, they can only make them when they have production in the requested color. Naturally, this can increase the time it takes to receive the samples.

An alternative is painting the samples but the surface of a spray painted object looks different from an injected one and may mislead you to approve something which later proves imperfect.

Do not make the error of ordering a single sample per product/color because you need reference samples for several purposes. Common sample needs include:

  • Samples for your showroom
  • Samples for lab testing
  • Samples for photo shooting and gift box preparation
  • Samples for your inspection company
  • Samples for your sales managers to show to customers

That is only the beginning of a long list and believe me, large buying offices like hypermarkets, department stores, and other large volume importers ask for even more samples because they are aware of the extensive need when introducing a new product.

The worst-case scenario is if you give the only color reference sample to a key customer after they place an order with you, you cannot determine which specific color to instruct the factory to begin with. It is a good idea to always keep one or more samples per color locked up in a safe place to avoid embarrassing errors. Due to the limited storage space, factories may not keep their reference samples at all after completing production.

You now have the information to better understand why factories are reluctant to provide free samples to new customers. In many cases, you can convince the factory to refund the sample costs after you reach a certain order volume. It is good business to negotiate this in the beginning.

Besides the sample charges, you will be asked to pay the freight charges for the sample delivery. This can get expensive because samples are usually sent by air courier in order to make up lost lead time and stay on schedule. Factories don’t want to pay these charges and it is often difficult to convince them to do so. If they do so, it is usually only after a successful business relationship has been established. If you need the samples urgently and that usually the case, you are better advised to look for a compromise, otherwise you may lose the competitive edge in your home market.

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