In light of the current legal climate, it is prudent for companies that regularly import goods from China to assess whether they have meaningful exposure to future lawsuits and, if they do, to take proactive measures now to protect themselves against, or at least limit, any future liability. Preparing for the potential rush of legal actions is a complex task requiring careful planning on several fronts.
Often overlooked by importers is that the prevention of claims starts with the selection of your suppliers in China and your own preemptive actions.
Let me give you an example of how it usually works. You visit one of the impressive Trade Fairs in Hong Kong, Guangzhou, Shanghai, or Ningbo and talk to as many exhibitors as possible. You come upon one company that has a nice booth, friendly staff, and one of the products you have been searching for. On top of that, their prices are much cheaper than the rest of the exhibitors.
You ask for a catalogue along with the company representative’s business card and you ask them to note their price quote on the business card. Since you are in a hurry because you still want to meet many more companies that day and other businesspeople are queuing behind you, you tell the booth representative that your company will contact them as soon as you return home.
You are very happy that you had a successful day and found a new trustworthy supplier.
Unfortunately, you already made a big mistake.
Never take for granted prices that are quoted to you during a Trade Fair. Especially if they are much lower than those from other suppliers. If something seems to be too good to be true, it surely will not be true.
This should certainly be applied to manufacturers in China. If one thing can be said about the Chinese people, it is that they know how to calculate prices accurately.
All you need to do is ask yourself why are the other companies unable to quote a similarly low price? Simply put, they cannot because they have calculated their prices based on their BOM (bill of material) and know exactly what their total cost is. If someone offers you a much lower price, he did either not do his homework properly or he simply is not playing fair.
Now let’s continue with the story. Back home, you proudly present your great discovery to your sales managers. Together you decide to go ahead with this terrific new product at a bargain price.
Now you have made the next big mistake. Never make a final decision before you receive proper samples from the supplier. Next, the samples must be tested and approved by your QC staff. At a minimum, the samples must comply with the legal requirements of your country. They should also meet your own high quality standards that you give to the supplier before the samples are made.
You have probably figured out where this story is going but let’s continue. Your sales managers do their jobs and begin offering the new product to your customers based on the very competitive price that was quoted to you at the Trade Fair booth.
You company has just made another big mistake by offering something to your customers based on a quotation from an unknown supplier.
I do not want to scare you too much but during my long professional career in China, I have seen cases exactly like this over and over again.
Step 1 – In-house Quality Control
How can you make sure that your company does not become the victim of an incompetent supplier and their sales staff?
The first thing you want to do, if you have not done so already, is to establish your own in-house quality control department. That is the first step to making sure that your company has the means to control the quality of all incoming samples or any other quality issues before you place any purchase orders.
Alternatively, you can employ one of the existing quality control labs in your home country. The main point being that it is imperative that quality controls be in place. However, I would consider outsourcing quality control only as a temporary solution if you plan to expand your import business in the future.
It is worth noting that these labs are not shy about charging you extensively for their services. Depending on your import volume, their cost may prove simply too expensive for you to achieve the profit you are expecting.
I suggest that you only consider them for specific tests that are required by your national or local authorities. Another reasonable use is to obtain third party certificates or testimonials that you may need if you have a customer claim needing to be resolved with your China supplier.
Having your own quality control department can give your company an edge over your competitors that do not have in-house quality control capability. If your competitors already have this service and you do not, starting a quality control department will level the playing field.
Customers hate filing claims and the extra costs related to quality issues. They prefer to buy goods from a source that provides reliable quality assurance. You should consider the cost of setting up a QC department as in investment in the future of your company.
At the beginning, you do not want to start with too large of a department because you will be learning from experience. Efficiency should be more important to you than size.
The composition of your department depends very much on the nature of your import products. If you are in the textile business, you may want to hire a textile engineer plus one or two assistants. If you are in electrical or electronic products, you need to hire an electronics engineer plus one or two technicians.
To perform their quality tests properly, your specialists will need suitable technical equipment. A note of caution: do not jump the gun by establishing a fully equipped lab at this early stage. That would prove very expensive. The easiest way to determine the kind of technical equipment needed is to rely heavily on your engineers after they are hired. They will know what is needed and where to get it. A discussion about equipping the test lab can easily be included in the interview process for the engineers.
This is the most reasonable way to establish your own functioning quality control department at an affordable cost and in the least amount of time.
Visiting your Chinese factories on a regular basis is a must for all importers that want to minimize their risks. As a businessperson, you regularly take precautions to protect your company’s interests and visiting your suppliers’ factories needs to be included as an insurance policy.
In this section, I emphasize the importance of personally visiting your suppliers in China. You may have heard other consultants that do not see the necessity of going to China at all. They suggest their clients order samples and place orders based on the results of their sample evaluation. I strongly advise you against this and will explain why. I have over 25 years of experience importing goods from China that tells me otherwise.
Of course, some very large manufacturers in China have solid QC organizations that can guarantee you a relatively constant level of quality products. If you choose one of them, you can probably afford to be a little easier going. However, chances are that they cannot offer you the most competitive prices because their superior QC organization costs money. Also, they likely already have a customer base in your home country distributing their products. This makes it less desirable to buy from them.
Unfortunately, even the much better organized companies cannot prevent you from being forced into filing a claim. Further into the book, I have included examples of very large value claims I have successfully helped to resolve. These demonstrate that size is not everything when it comes to filing claims.
Most likely, you will want to deal with smaller or medium size factories. These companies need clear instructions from you and this can be only done if you sit down face to face to discuss your requirements and expectations.
Remember this eBook is about settling claims that arise when you import from China. How do you expect to achieve this without ever visiting your suppliers in person to explain and discuss your quality requirements? You need to go over designs and standards. You need to ask them pertinent questions and answer their questions to be positive they fully understand your requirements. Only after you have clearly laid out your requirements will you be a position of strength if things go badly.
Besides, the Chinese business culture favors frequent personal contact with their overseas trading partners and visiting suppliers is the best way to do this. It will go a long way in developing a good working relationship that will pay off time and time again.
The smaller and medium size factories can usually offer you prices that are more competitive. Since you are getting into importing to improve your profit margin, they will most probably be the better partners for you.
By visiting your pre-selected factories, you will be in the best position to decide with whom you want to deal with and whom you will entrust with your precious money but only after you have concluded your negotiations.
During your factory visits, you will be in for many surprises. You may have to revise your first judgments that resulted from your earlier communication with some of the factories. You will find that some factories are smaller than expected and have less production capacity available on their premises than you had been led to believe. They do not want to miss out on your purchase orders so they asked a subcontractor to produce for them instead.
This is totally unacceptable because the subcontractors are almost always inferior when it comes to quality management. More importantly, they care less about your orders because you are not their direct customer. If a factory has a policy of hiring a subcontractor without informing you, simply do not work with them if you want to stay out of trouble.
Another way that you can achieve good results is by employing a neutral outside company as your personal consultant.
Our company provides these services at an economic cost. We have a deep understanding and knowledge about importing from China based on dealing with Chinese manufacturers for more than two decades.
Once you send your requirements to us, we will execute your project in the best possible manner. You will not need to be concerned about inferior factories because our proven and experience based Due Diligence process avoids them every time.
We have no special relationship with any factory and will always follow your clear instructions. Here is the link to send your inquiries: http://www.webmediabiz.com/consulting/
During your factory visit, you might ask them if they have been audited before. If the answer is yes, ask to see the audit results. This will give you an idea about the factory’s performance capability.
If they have not been audited, ask their permission to have an audit conducted. Explain that a positive audit outcome is the only way you will be able to do business with them in the future.
You should ask the appointed auditing company to include a credit check of the factory. These checks usually cost less than US$ 1,500 and they are often quite revealing. Among other things, such a check can reveal if the businessperson you are about to contract with is in fact the factory owner, or just some broker posing as the factory owner.
Does the factory pay its bills? A thriving company is far less likely to risk its reputation by cutting safety corners to save a few Yuan than a company on the verge of going under. The credit check may also reveal other Western companies to whom the Chinese company has been supplying products.
What do these other Western companies think of this Chinese supplier? Learning that a well-regarded Western company has been purchasing product from the Chinese factory without major problems for the last five years is obviously a good sign.
Visiting one or more factories is relatively easy because the factory will arrange ground transportation for you. The first factory does not even mind to delivering you to the second factory, their competitor.
Since transportation takes a lot of time, you first need to make inquiries with the factories for their exact locations. If you schedule your meetings according to their suggestions, you can save substantial time that is better spent in discussions.
It should be obvious that it makes more sense visiting your supplier at their factory rather than meeting them in your nice hotel, which would be so much more convenient. A hotel meeting deprives you from meeting the entire team you are dealing with.
Before visiting any company in China, whether a factory or a trading company, make sure that you have your business cards ready. There is really no excuse for not having enough business cards with you. In all major cities, there are print shops that can quickly print business cards for you if you run out. In the Chinese business culture, it is very unprofessional when you cannot hand out enough business cards to your negotiation partners.
It would also be unwise considering the high factory staff turn over rate. Key staff members change as they move on to other factories for better opportunities. If they have your business card, you can bet that they will contact you sooner or later. These people already know your requirements. Visiting them at their new factory could be very helpful because they will do everything to convince their management that your company is an important customer and you will receive better price quotes.
I recently read an article from another author stating: “In my experience almost every sales person that I have met in China who is not the owner of the business, has shown interest in either setting out on his own by ‘stealing’ his employer’s customers and product designs or simply doing his own deals on the side through friends, contacts, or family.”
There is some truth in that although I cannot fully endorse it or maybe I have just been lucky all these years.
On the other hand, Chinese people want to be recognized and when meeting around a conference table you can only address them with their correct name after you have received their business card. For visitors from western countries it is usually quite difficult to memorize all the different names and without their business cards, you will almost certainly fail.
If you have a notebook computer bring it along to all of your meetings. If you do not have one, consider purchasing one. Believe me, the purchase will be worth all the money you spend for it.
Your notebook computer provides you with all the information necessary to conduct business negotiations and enables you to show your company background information and your packaging concepts to factory management. You can also input information from your discussions without the need to later type your paper notes into reports. This is easier if you have a business associate along but with a bit of practice you can manage typing notes while still giving the meeting your full attention. This saves you precious time organizing information when you return home or you could even send your reports on a daily basis to your head office if further action is needed.
Upon arrival at the airport, it is not unusual to be greeted and escorted to the factory by both a driver and the supplier’s sales manager. The company owner might even show up to greet you and ride with you to the factory. The Chinese truly are good hosts.
This is a good thing because in most cases the driver does not speak English. It is also a good opportunity to use the drive time to make some small talk with the manager. You can begin developing your first in-person impressions before the meetings and negotiations begin. Use this time to learn the position your contact holds in the management hierarchy and who makes the final decisions.
That is important because the Chinese may want to delay decisions at the conclusion of your meetings. They will tell you that they have to wait for the final decision maker who is not available now. Since your whole purpose for visiting suppliers is to make a final selection of your future business partner, you should expect the decision makers to be present so that you receive their final proposal to base your decision on.
At the factory, you will be shown around the premises. Be sure you take your time studying the production lines, their QC arrangements, and the amount of technical equipment the factory is using. Additionally, you must check whether the factory is complying with Chinese labor laws that prohibit the use of child labor and extended working hours. You will definitely want to include a clause in your P/O about labor law compliance to protect your interests. Since you are only asking the factory to comply with existing laws, there is no reason for them to object.
As you tour through the building(s), be sure you check out what is currently in production and whom it is being produced for. Sometimes management may be reluctant to disclose this information but you can learn it from packaging materials or shipping cartons.
Do not be shy about taking photos. You should ask first, but I have seldom been prevented from doing so.
Look at the cleanliness and tidiness of the factory. If there is no space available to store the completed products before they are packed, you can expect that some of them will be scratched or covered with dust. Even if they clean the dust off before packing the goods, it will cause more scratches and damage.
Ask questions and investigate their QC processes. I typically begin by learning what they do when defects are discovered. Do they simply log the defect followed by reworking it or scrapping it without further action. Or do they investigate and correct the root cause of the problem? Because of the high employee turn over rate, a common cause of defects is a new and inexperienced employee. A little additional training or even making the employee aware of the problem often corrects it.
Whether the factory has achieved ISO 9000 or ISO 9001 certification is not critically important as long as they take corrective action to improve production quality on a continuous basis.
Also, check if the factory has a decent or fully equipped lab. Of course this depends on the size of the factory and what kind of products are being manufactured.
Find out if the engineers are familiar with the regulatory requirements of your home country. This can be very important because it would be very difficult to teach them if they do not already have the necessary know how.
If you plan to import to the EC, the factory must deliver products that fully comply with the ROHS directives, otherwise you will be in deep trouble when non-compliant goods reach home. If they claim to be in compliance, ask how they can guarantee it. They should be able to provide lab certificates or for electronic products, they must be able to show you approval certificates from internationally recognized labs.
Refrain from accepting certificates from local Chinese labs because they are too difficult to verify.
Inquire from management about their delivery times during the low and peak seasons to gain a clear understanding of how long it will take to manufacture and ship your products. It would also be good to ask them about their order backlog, which will give you an indication of how the factory is doing.
If they only have a few orders, there may be a reason behind it that will be important to your final decision. If the factory does not adequately explain the reason, there is a chance that their competitor knows, which proves one more time how important it is to visit the factories in person. A trading company may have their own interests in mind and will not inform you that the factory has steadily been losing customers.
Another very important factor is whether the factory outsources part of their production. Common but critical production processes that should be kept in-house include plastic injection molding, metal punching, painting, PCB injections, etc. If a major production process cannot be done in house, there is always a risk that they cannot properly control the subcontractor. This can result in schedule delays and quality problems.
Factories are usually very reluctant to let you visit their subcontractors and mostly for a good reason on their part. The subcontractors also work for their competitors and the factory you are visiting would rather not tempt you into investigating other companies. Of course, there can be many other reasons, labor law violations being another one.
Some companies subcontract final assembly to maintain schedule if they have over committed their own assembly line capacity. By all means, avoid this practice because you will often receive inferior goods. It defeats the purpose of selecting a factory based on a positive evaluation if your products are not really manufactured there.
Be sure to include a subcontracting clause in your P/O to protect your interests in the event a claim arises after the goods arrive at your home country. In many cases, the subcontracting factories are owned or managed by relatives. A very important Chinese business concept is called “Guanxi” which literally translates as “relationship”. Family demands to help each other can overshadow your need for stable production and acceptable quality.
Unfortunately, another bad Asian business practice is to obtain a purchase order before having a full plan of how it will be manufactured. So, you believe you are ordering 100,000 pieces produced at this particular factory, but what actually happens is this factory is only able to produce 20,000 pieces. They outsource the rest of the production to four or five other factories where they are not able to control the quality and you personally have little or no influence over what occurs at the subcontractors.
If you do not visit your factories, you will not be aware of these practices and may face serious problems later.
Since factories can use different ports of loading, you need to inquire which one is usually used. You need to know the applicable freight charges to accurately calculate your landed costs. Another reason to learn which port will be used is because some ports have only one container ship departing each week and you need this information if you are on a tight schedule. If you need to meet the Christmas sales season or have scheduled a major promotion for a new product, completing production on time but waiting an extra week for it to ship can turn into a disaster.
Also, some products can only be shipped by air freight. Notebook computers and MP3 players are typical examples. The key components of these products are ICs that fluctuate in price. At present, their prices are in constant decline. It is imperative buyers receive their goods within a short time, otherwise competitors that air freight their shipment at a later date will easily be able to sell at a price that eats up all of your profit. This makes air shipment unavoidable.
When discussing the payment terms with management, ask them for their banking details. This enables you to do a background check before you place your orders with them.
Finally, you need to negotiate the payment terms that 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 a bank loan to start 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 value 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 are also probably having trouble getting a bank loan. 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.
Before you can negotiate prices with the factory, you need to inform them about your product and manufacturing specifications, quality standards, and any other terms or conditions. Failing to come to agreement first on these issues will likely result in very competitive price quotes but for a substandard quality that will cost you dearly later on.
Most important is making sure that factory management understands your specifications.
What sort of things do you need to specify? Included should be:
- 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 inform the factory about their color or color combination requirements. I can tell you from my experience that the results will not be very good. Especially if you have several factories involved that have to follow your color requirements.
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 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 by using 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.
Your requested specifications set all the standards for manufacturing samples, mass production, and inspection of your goods. This should make it clear why negotiations need to be done in person by talking with the responsible managers.
By using the same procedure when negotiating with every factory you visit, you will receive information that is directly comparable for each quote. This will simplify your decision making process. Since you will visit several suppliers during your visit, you will have current impressions about each factories’ performance capabilities in addition to the price quotes to make this important decision.
Two of my other eBooks titled How to Make Business Negotiations in China More Successful and How to Make Chinese Factory Visits More Successful go into detail on the subject of negotiating with the factory management. What I have provided here is a summary of that information. If you want more information, these books are available from our website and are a must read literature for all importers.
When verifying the quality of goods imported from China you have three choices to consider.
- Let the manufacturer perform a self inspection
- Have someone from your company perform the inspection
- Appoint a third party inspection agency to perform the inspection for you
If you really want to be on the safe side, I would not suggest letting any manufacturer check their own quality. It is much too risky and you will only find out after the goods have arrived at your warehouse that something is wrong and by then it is too late.
Having someone from your company conduct the inspection is actually not a bad idea but is prohibitively expensive if that person has to travel to China solely for this reason. What remains, is seeking out an experienced international inspection company with several local offices in China. Key office locations are Hong Kong, Shenzhen, Guangzhou, Shanghai, Ningbo, Xiamen, etc.
Why is that important? If an inspection company has only one office in Hong Kong (southern China) but frequently needs to inspect goods for your company in Northern China, you will be charged for their travel expenses including the cost for the accommodation. Over time, the costs add up and it really makes no sense to work with such a company. The better option is relying on inspection agencies with offices throughout China. The travel charges are much lower because the inspectors only have to travel from their nearest office to the factory. Besides, they are usually familiar with the area and may even speak the local dialect, which makes communication with the factory staff easier.
It is also obvious that they can visit your factory much faster because they are in the vicinity. This becomes important when an inspection has previously failed and the re-inspection needs to be conducted only 1 or 2 days later. Usually the factory has to pay the re-inspection charges after failing an original inspection due to it being the factory’s fault. If the re-inspection charges are too high because of extraordinary travel expenses from your inspection agency’s head office, you are in for lengthy negotiations with the factory. They will argue and try to avoid the payment. In other words, the practical decision is appointing an inspection agency that already has offices near major production centers.
Depending on the size and importance of the order, you may want to consider more than a single inspection after production is complete. You can choose from three primary inspection methods.
Initial Production Inspection (IPI)
This inspection takes place when approximately 10-20% of the total order quantity is produced. It normally covers the following criteria:
- Verification of the production schedule
- Check of raw materials
- Partially completed goods
- Finished products and the packaging
- Inspection for appearance, workmanship, color, measurements, quantity, packaging/packing details, compliance with directives etc.
This inspection method is used mostly when the order volume is very large and production needs to be closely monitored from the very beginning to assure the delivery deadline will be met.
The benefits of an Initial Production Inspection are that the status of the production can be verified at every stage. If problems are found early, there is still time to take corrective action and prevent the early problems from affecting the entire order. Since production is already in progress, you will have a clear picture of the factory’s performance at that time.
During Production Inspection (DPI)
This inspection takes place when approximately 40-60% of the total order quantity is produced. It should cover the following criteria:
- Production status monitoring
- Raw materials or key component validation
- Quantity and performance checks on completed products
- On-site tests
- Finished products and their packaging
- Inspection for appearance, workmanship, color, measurements, quantity, etc.
- Verification of packaging materials and details
The benefits of a During Production Inspection are that the status of the production can again be verified at this stage. By performing this inspection, you can verify that corrections have been implemented since the Initial Production Inspection. Additionally, you will still have a chance to apply other corrective actions before the final inspection.
Final Random Inspection (FRI)
This is actually the most important of the three inspection categories. It is commonly used to safeguard the shipment when a consignment is 100% manufactured and at least 80% packed.
International sampling plans ANSI/ASQ Z1.4, ISO 1259, BS6001, GB 2828, or any client specific method will be used and a representative number of shipment samples will be randomly drawn for the visual evaluation.
It will at least cover the following criteria:
- Total quantity of finished product
- Cosmetic and workmanship check
- Measurement and on-site testing
- Performance check of completed products
- Inspection for appearance, workmanship, color, measurements, quantity, etc.
- Verification of packaging material, labeling, barcodes, shipping marks, etc.
The benefits of a Final Random Inspection are that usually the most serious defects or deviations from specifications will be detected and the shipment can be stopped at this stage if necessary. However since this inspection is already close to the actual shipment date, there is a risk that the scheduled shipment date cannot be met which could cause serious problems if the requested re-work is impossible or takes considerable time. In other words, a Final Random Inspection alone, prior to releasing a shipment, may not prevent or uncover risks that might appear at earlier stages of the production process.
It is therefore highly recommended that higher risk products be subject to greater QA intervention such as a product design review, supplier evaluation, prototype testing, and the execution of the Final Random Inspection in combination with the Initial Production Inspection and the During Production Inspection.
You now know the main inspection categories for verifying acceptable quality. But how is it done?
You must provide at least one sample together with all your specifications and requirements to the inspection company of your choice.
Since this inspection company will act on your behalf, as your savior in case of a non-compliant production, it is very obvious that you must feed them all the information you have to let them do the job. This is even more important when your product is more complex like home appliances and consumer electronic products.
Please consider that they can only follow the general inspection procedures and your specific requirements. If you do not inform the inspection agent about certain details, they will not take the necessary action and cannot be held responsible.
Below are links to the major International Inspection Companies. These are companies I have worked with over a long period of time. You can visit their websites, contact them and find out which is the most suitable for you.
|Asia Pacific Inspection Hong Kong||http://www.api-hk.com/|
|Bureau Veritas Hong Kong||http://www.bureauveritas.com/cps|
|HKIC Hong Kong||http://www.hk-ic.com/|
|Intertek Hong Kong||http://www.intertek-labtest.com/|
|PRO QC Hong Kong||http://www.proqc.com/|
|SGS Hong Kong||http://www.hk.sgs.com/|
|TUV Rheinland Group China||http://www.chn.tuv.com/eng/index.jsp|
Most of them have offices in other Chinese or Asian cities and will provide an excellent service to you.
You have an important role to play by specifying to your supplier what you actually want. This is often underestimated by importers and must be addressed during your meetings with the factories.
It also has to be included in your P/O and should be as detailed as possible.
You may need to consult with your own technical staff in this process. If you do not do this, you might find that you receive a product that meets all your stated requirements and the applicable regulatory requirements, but which is absolutely wrong for your intended application. So, first of all, you should concentrate on specifying your needs specific to the intended use of the product.
What must be included in your Purchase Order (P/O)
Here is a summary of what I suggest you incorporate in P/Os regardless of the product type you are dealing with:
- Clear and detailed product descriptions including requested color, measurements, sizes, etc.
- Clear and detailed packaging information including barcodes and shipping marks
- Order quantity
- Delivery date
- Port or airport of loading
- Payment terms
- Spare parts or spare units if any
- Agreed defective rate
- Guarantee clause
- Indemnification clause
- Late delivery clause
- Transshipment clause
- Clause for compliance with requirements in your home country
- Information whether goods must be inspected and by whom
- A clear statement that the mass production must comply with the submitted and approved samples
However, do not overdo it. I have seen P/Os that could have been issued by lawyers and you can imagine that factories do not make the effort to employ lawyers just for the sake of checking P/Os. Remember, it is all about partnership and if you are still afraid the factory will cheat you, your factory evaluation was not thorough enough.
Here are additional comments about what must be included in your P/Os:
- Order quantity – Should match the container loading capacity or the total quantity of products in case you want to place different products from the same factory in one container.
- Packaging information – Very important because it is a cost for the factory and could be manipulated in their favor. For instance, there are several levels of corrugated cardboard quality. These 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 that you could easily punch a hole through it with your fist. This quality is unacceptable as a sales packaging 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 a barcode scanner cannot read the barcode properly, the product cannot be registered during checkout by the hypermarket/supermarket cashier. Companies like Wal*Mart consider this a major defect and would not allow any shipment under such conditions.
- 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 to protect your compensation claim in the event there is an epidemic of defects or overall poor product performance. It splits responsibilities 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 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. 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 have even 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 own 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 these 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 countries 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. The inspection procedure was previously explained.
- Information that mass production must comply with the submitted and approved samples – As 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. Therefore, it is advisable to discuss as much of your standard P/O content as possible with the factory management during your visit. Trying to enforce your requirements when later communicating from your home country will prove much more complicated.
You can also shorten the whole process by providing a copy or draft of your standard P/O to management during the meeting or have it sent in advance if you are certain that you are going to work with that factory.
Your contracts with Chinese suppliers should contain a specific provision requiring the Chinese seller to obtain and maintain sufficient product and general liability insurance with a reputable international insurance carrier in order to provide sufficient protection to the importer in the event of defective or unsafe products. If at all possible, the importer should be named as an “Additional Name Insured” on the insurance policies. Insurance should not be seen as a replacement for everything else explained in this chapter, but it is your backup. Insurance almost never covers more than your legal fees and out of pocket damages. It will not compensate you for time spent defending lawsuits nor will it repair your damaged reputation.