When visiting your suppliers’ offices the meeting normally is held in their showroom. Taking a close look at their presentation should give you a pretty good idea about how well or poorly that company is organized.
Ugly, untidy, and dirty showrooms do not reflect well on the supplier’s diligence. However, that impression may deceive you because your supplier may still live up to your expectations.
I have found that at least 50% of most suppliers’ showrooms in Hong Kong look like a garbage dump and you might be too scared to work with such suppliers. Rest assured that you can work with these suppliers but you need to take some precautions. If you follow my checklist and receive satisfactory answers from your suppliers, you still may want to give your new supplier a try.
It is all about competence and if you have the impression that your new supplier has enough of it, go ahead and make his day.
Ask the person you are meeting with for their business card if it is not offered. Ask then if all the information on it is current and accurate. Make notes if you are told some information has changed. Also, ask if he or she will be your contact person for future communication. Of course, this would be very helpful since you are already getting to know this person.
If they will not be your future contact, ask him/her whom you should be contacting instead. Knowing the name is vital because larger companies often have dozens of marketing people working for them and organized into marketing regions or product divisions. You may be speaking to someone that represents the entire company to prospective customers.
Which questions should you ask during your meetings with each of your suppliers? You want to ask at least following questions:
- What is your FOB price in US$?
- What is your usual port of loading? They can sometimes offer you the choice of several ports.
- Do they have their own factory, what is the name, and where is it located?
- When was your company established?
- Who are the owner(s)?
- How many production lines do you have?
- How many workers does your factory employ?
- What are your main export markets?
- If the answer is Europe, your next question should be: Which countries there?
- Who are your main customers? Of course you are mainly interested in customers from your country but it would be interesting to know if large companies like Wal*Mart or Carrefour are buying from them.
- What is your delivery time during normal season and peak season?
- Are you subcontracting part of your production and if so which parts?
- Does your factory have their own injection machines?
- Is metal punching done in house?
- Is your factory ISO 9000 or ISO 9001 approved?
- In the event the quantity from your shopping list is not sufficient: What is your minimum order quantity per product?
- Which laboratory are you using for your approvals?
- What approvals does your company already have?
- Which certificates have been obtained?
- What new products do you have that are not shown at in the showroom?
- When can I see sketches, drawings, or photos of these new products?
- Can you please e-mail me your bank details? You will need this to pay the sample costs when you order product samples.
If the staff member you are meeting with can answer most of these questions, you can be relatively sure that it is not a trading company. Even if they pretend that they have several factories working for them, they are not likely to know all of these details.
I should point out that you should have already disclosed the content of your shopping list before asking all of these questions.
It is also essential to provide your company’s specifications before asking for price quotes. Of course, you can play the hide and seek game by not disclosing your requirements to the supplier. The big disadvantage with this is that you will be drawn into lengthy negotiations later because the supplier will tell you that his price was based on his own standard and everything above that must be added to the originally quoted price. There can be no doubt that the supplier is right.
I believe it is part of the fair play to fully disclose your requirements up front. To do anything less may force your supplier/ factory to lower the product quality by using cheaper materials in order to obtain the purchase order.
Think of the lead paint tainted toys that were recently imported into the United States but had to be recalled in very large numbers. I do not know the real reason why this cheaper but dangerous paint was used in the first place. It could have been pure greed but it also could have been that the buyer pushed the suppliers too hard for lower prices that he could not achieve without cutting corners.
Although China is a land of nearly unlimited opportunities, their factories cannot escape worldwide developments and price hikes. With the price of oil above US$ 115.00 per barrel and the US$ is at its lowest value in many years, Chinese suppliers/factories are also feeling the crunch and have to adjust to survive.
This means it will be difficult for you to negotiate much lower prices because there is no more room for your supplier/factory to maneuver. On the other hand, it cannot be much of a disadvantage for you because everybody faces the same problem.
Do not forget to take photos of the showroom samples with a digital camera. Sometimes you may have to shoot photos from different angles to get it right. Digital photos are essentially free so more is better than less.
You don’t often have the opportunity to meet your suppliers in person. Use your time well to collect all the information you can. What you learn now could be vital evidence if there is some kind of misunderstandings later.
Goal 1 – Visiting a new supplier for the first time to perform a detailed evaluation
Since you want to make sure that the supplier is the right business partner, you will have to ask them many questions to verify it. Be sure to furnish them all necessary background information so they can fully answer your questions.
You want to show them your Company Catalogue and explain your company’s policies. Part of your company’s policies is your corporate identity artwork concept, which you need to explain thoroughly. This includes Sketches, Drawings, and Photos of packaging and branding information along with anything else that sets your company’s products apart from the others. Here you must go into detail to be sure the factory has a clear picture of what you need.
The supplier might not be able to meet your requirements but they may tell you where you can find products meeting your exact needs. This can be very helpful information and save a lot of time.
Bring along ads from newspapers and magazines showing products already being distributed by others that you are interested in for your customers.
Be prepared with Color chips of any pre-selected colors. Ideally, these will be real chips that you cut from products similar to what you are looking to buy. You will probably want to leave these samples with the supplier so they have something tangible to develop for the plastic injection molds. Otherwise, you will lose time and money by having to send them when you get home. Your supplier may also have a question regarding the color and you can discuss the details much better face to face.
You want realistic price and delivery quotations from the supplier. To accomplish this you must inform them about your required Specifications. Your quality requirement is a very important cost factor. The requested quality standard is defined by your Acceptable Quality Level (AQL) which sets the limits of the satisfactory process average.
Finally, you need to discuss your entire shopping list, which is what the suppliers are mainly interested in. This gives them an idea about your company’s buying potential.
This is a lot of information but if you prepared some copies for the supplier, you can focus on the main points in the meeting. Be sure to ask them to study all the details and get back to you if they have any questions.
Goal 2 – Visiting a supplier/factory to discuss a new large volume project
The goal of this visit assumes a certain familiarity with the supplier. Without knowledge of the supplier/factory, you would not want to place a large volume order with all the inherent risks involved.
You have to be very specific here. Give as much information as you can, to be followed by written records if possible in Chinese and English. This is a time when money is well spent on an interpreter. Even if your interpreter does an excellent job translating your discussion, the supplier’s engineers may not listen carefully enough or might not take sufficient notes. Assign your interpreter the task of translating a written copy of your requirements. Leaving your own written copy of instructions allows management and engineers to refer to the details to when they are needed.
Some technical issues cannot be understood by the sales managers because they usually lack a technical background. This stresses the fact that it is important having the right people attend the meeting. It never hurts to request engineers and/or production managers to be available when you first begin arranging the meeting.
Do not make the mistake of meeting the sales manager in the comfort of your hotel lounge for lunch to deliver the details of your project. He will never admit that he does not completely understand what you told him and the engineers will receive filtered information. Undoubtedly, lacking the vital technical information that will cause complications with your project.
Several times, I have seen the engineers received more than their share of the blame from their management for improper samples, missed deadlines, etc. If they had the correct instructions at the beginning, the entire disaster would have been prevented.
At times, I have had important meetings attended by 3-4 marketing staff, up to seven engineers, plus the company’s president or vice president. Admittedly, it can be time consuming to get the entire message across to this many people. However, in the long run it is time well spent so that mistakes or complete project failure do not occur later.
Often, you begin these negotiations at the inquiry stage. Your customer at home wants more information before placing a firm order through you, the importer. You increase your chances of successfully landing the order if you can negotiate all of the terms, conditions, and price with the supplier. Your personal relationship comes into play at this stage of negotiation.
Commonly, a large retailer will request several importers to submit a proposal for a large purchase order. If you think this is the situation, ask the supplier/factory if they have received similar requests from other importers. If you have a good working relationship with the supplier, it can set the wheels in motion for you to receive the winning bid over your competition.
If you have treated the supplier fairly in the past and have not pushed unduly hard when their back was against the wall, they may reward your good relationship with the preferential quote that seals your deal with the customer back home.
Goal 3 – Visiting a supplier/factory where you are having major problems with the quality and/or delivery schedule
Here you get right into the details by asking management for a full explanation of the problems and what they are doing to solve them.
They should have had plenty of time to investigate the problems internally, after you first alerted them. It is totally unreasonable for them to request time to investigate at this point in time. You should expect them to be reporting solutions and progress towards fully resolving every issue you have identified.
To give you a full understanding, I will illustrate with a personal example. One of our factories was scheduled to deliver a large quantity of products with a tight deadline. Three separate shipment dates were involved. Unforeseen events delayed the start of production. This was compounded by the fact that they only had a single mold for the plastic injection machine. It became obvious they were not going to be able to meet the first shipping deadline for this important contract.
Working closely with the factory management, I was able to convince them to manufacture another injection mold. Although it increased their costs for this project, management realized that it would enable them to take on additional customers in the future.
By reacting quickly and proactively, production was doubled in approximately 2 ½ months. The project was saved by reacting quickly to get a timely solution in place.
The main point is that it is essential to visit the factory yourself or appoint a consultancy service organization like our company https://www.webmediabiz.com/consulting/, as soon as possible, when you are facing major problems. Problems with large volume orders cannot afford delayed solutions. Not only does this solve the immediate problem but it also demonstrates that you mean business and expect the factory to take any problems with your orders seriously.
Subcontractors may also be part of the problem. The factory may not be receiving the needed or correct raw materials, components, printed materials, etc. Do not hesitate to insist these parties directly participate in the meetings. They may only need to attend specific sessions but they definitely need to be part of the solution if they are part of the problem.
Make it clear to the factory that you expect a solution to the problem to be found during your visit. Do not give them the option of waiting until you return home before proposing and implementing a solution. Once you do return home, request that regular progress reports be sent to you.
Goal 4 – Detailed negotiates of conditions and prices for new large volume orders
It is common to negotiate better conditions and prices for large volume orders with the factory. If you can give them a larger than average order, they in turn have a better chance of negotiating lower prices for raw materials and components if they order them in bulk quantities.
Here is an example of negotiating the details. If the factory needs an average of 50K electric switches per month they typically negotiate the price based upon 50K per month. If you come to them with an order requiring 200K electrical switches for a single shipment they will certainly get a better price from their supplier that can be included in a lower price quote for you. This might only be 2 or 3 US cents but adding up the savings on all the components will give you a substantial price reduction.
Of course, this also applies to printed material and packing materials. Do not forget to ask for a price concession for the factory’s savings from reduced tooling setups and other production startup costs.
Just telling the factory that you need a 10% lower price is not convincing to the factory. They will give you the standard reply that they cannot afford it. The right strategy is breaking down the product into its components or materials to make your request more convincing.
Remember, every saved cent increases your profit margin. However, be realistic and do not overdo the negotiations because it could backfire. The factories might choose to save costs by reducing the quality of the delivered product.
Again, a real life example to demonstrate what could happen. Factories can increase the percentage of recycled plastic material marginally and you won’t realize it even during a final random inspection.
The plastic material becomes softer and the surface less glossy. It also leads to a lower melting point for the plastic. If is used for home electrical appliances (toasters for instance) it more easily deforms when exposed to heat.
Another quality problem with plastic materials that you possibly have experienced in your own home is lack of UV stability. Lack of UV stability causes discoloration in plastics when exposed to sunlight over time. UV stability is a cost factor to the factory and they know it will not be caught until long after the goods leave the factory.
If you intend to import electrical appliances and electronic equipment to Europe, the goods must comply with the ROHS directives (Restriction of Hazardous Substances). Member states agreed that after 1st July 2006, any product new to the market will not contain any of the six banned substances in quantities exceeding established maximum concentration values. The six substances are lead, mercury, cadmium, hexavalent chromium, poly-brominated biphenyls (PBB), and polybrominated diphenyl ethers (PBDE).
The factory must prove to you that they are complying with these directives but it is very difficult for you to verify it because of the high cost involved.
The point is to make you aware that the factory has plenty of options to reduce their cost when you negotiate unreasonably. First they will use legal methods to get costs down but might resort to and illegal methods if you push them too hard. Your working relationship should be a partnership that seeks a compromise rather than to continue squeezing.
Those are the general discussion points but you need to address these other key points during the meeting:
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 will not 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 do not have much backlog. A large amount of incoming material means a lot of backlog.
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.
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.
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.
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.
Most important is to make sure that factory management understands your specifications.
What sort of things do you need to specify? Have you included:
- 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 do not go over well in Europe or the USA.
Many importers use the Pantone Color Chart numbers to instruct the factory about their color or color combination requirement. Follow this link to the online Pantone Color Chart:
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 that 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?
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 will not 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.
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 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 only be 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 first receiving the necessary packing material and that depends on the receipt of your artwork. Beside the possibility of damaging the goods, there are 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 it 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” dominates 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.
The Chinese do not appreciate using a sledgehammer approach to obtain better prices 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.
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
- 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 so 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.
- 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.
- 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 cannot 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.
- 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.
- 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.
- 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.
- 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.
- 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 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 that 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.
- 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 country’s laws and you must protect your company from damage for non-compliance by adding a clause in your P/O.
- 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.
- Information that mass production must comply with the submitted and approved samples – As already mentioned several times, 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 supplier/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 supplier/factory.