How to control a Chinese supplier’s behavior?

Controlling a supplier's behaviorI received several emails recently from readers asking how they can increase their control over a Chinese supplier.

They experience late shipments, unacceptable quality, and/or price increases mid-way through production. Sometimes they get no response to their emails. They have the feeling that the supplier does not care about them.

How can a supplier’s behavior be controlled more effectively?

Buyers should work on their suppliers incentives and follow production closely.

And how to do it? I have listed 4 solutions below (1 “carrot” and 3 “sticks”).

1. Be seen as a “good customer”

If you want to control your supplier’s behavior, do not be associated with small and unprofitable orders… Because they are seldom given attention and priority.

The objective is to ensure that your suppliers take care of your current production because they are happy about it and they hope to get future orders. There are two things you can do:

  • Make your orders look more appealing: don’t drive their profit margin down to zero; be clear in your requirements and keep development work easy (for example by providing a sample to copy); avoid overly complex breakdown of colors or sizes; do not be unfriendly in their presence, etc.
  • Find suppliers who will value your business: your orders might seem insignificant to a large factory, so try to find a smaller manufacturer. It is important that top management keeps an eye on your orders.

2. Know what is really going on

If you let your supplier ship the goods without somebody checking quality on your behalf, you are running huge risks.

When it comes to consumer goods for Western countries, it is safe to estimate that the average Chinese exporter ships products that are inadequate–for one reason or another–at least 20% of the time.

If you cannot control quality by yourself, get assistance from an inspection company. They propose tools for different situations. Here are two of them:

  • You should try to detect quality problems before shipment, because a container cannot be returned to the factory. So most serious buyers conduct a final random inspection, to confirm that quality is acceptable.
  • And if you suspect the supplier is not doing a good job, you should catch the issues early (and avoid poor re-work and late shipping) with an inspection during production.

If you don’t know where to start with QC inspections, you can read four simple steps for starting to do quality control.

3. Tie payments to results

As long as you owe money to a supplier, it is much easier to control his behavior (since he risks a cancelled order or a request for discount).

Then, how to ensure that (1) quality is satisfactory, and (2) timing is respected? The solution is to settle final payment only after an inspection is passed AND the goods are shipped out. This is totally standard, and you should not hesitate to require it.

Let’s take an example. You write “Penalties for late shipment: 5% per week after promised ETD” on your P/O, and you negotiate to wire 70% of payment after shipment. In this case, the supplier will think twice before delaying your order.

Unfortunately, there are cases where this will not help you control your supplier:

  • You give orders in a continuous flow, and you depend on your supplier for a good part of your business. In this case, try to work with several suppliers to minimize risks.
  • You purchase products with no customization, and the supplier can easily sell them to somebody else.

To know more about this topic, you should read Paying by bank wire (T/T) and Paying by letter of credit (L/C)

4. Sign a contract

If you cannot follow the above recommendations, you can try to do business on familiar grounds: with a legally-binding contract.
There are lots of misconceptions. No, a purchase order is not a contract. No, Chinese suppliers are not used to signing contracts, and sometimes they don’t even read them. But yes, a contract can be enforced (in China only, except if the supplier has assets in your country) if it is drafted by a lawyer specializing in Chinese law.

A contract can give you more control over a supplier’s behavior, in many ways. If you approve a factory, it can discourage sub-contracting. If you have valuable intellectual property, it can prevent copying (or re-use for other buyers). If you are not happy about your supplier’s behavior, a demand letter from your lawyer might frighten him into cooperating.

Contracts are mostly used for big orders, or for very sensitive projects. My clients (SMEs buying from China) do not use any contract. And, from what I observed, mega-retailers have contracts but seldom enforce them–they rely heavily on the hope for repeat orders, on quality inspections, and on the fear of penalties.

What not to do

Equally important is what I did not mention in the above list. Let’s take an example: developing a personal relationship with a factory boss. It might help. But importers often think that it is sufficient, and they are mistaken.
That’s why so many local trading companies cannot control the behavior of the manufacturers they work with–even when they pretend to own the factory. Sometimes they have all wrong:

  • The factory sees them as a bad customer, since they have access to so many other local manufacturers and they push prices down.
  • If they have a personal bond with the factory boss, they don’t dare to inspect quality (to avoid making him “lose face”), and they wouldn’t even think of a contract.
  • Their payment depends on the importer’s payment, so this element of pressure is somewhat lost.

This is good news for savvy importers. If they use the right tools, they can be very effective without the need for any intermediary.

Related article: Managing Chinese suppliers: how to maintain your authority.

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Photo credit Loren Javier

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Comments

  1. says

    Good post.

    In my experience some some of the key factors in keeping a supplier driven to your business are: knowing where you stand with the supplier and verifying your business attractiveness to the supplier at several points in time (amazing as sometimes the purchaser will believe his/her business always ought to be welcome, and also how they do not realize at which speed supplier grow and move on); being upfront and relatively transparent regarding business level and coming forecast; keeping communication channels opened (if business is low for awhile, inform supplier and let them know this is temporary); if volume is small, compensating it by bringing some learning or development potential to suppliers; being professional at any time.

    When we recommend suppliers to buyers, we always take into account a business fit factor, reflecting some of these aspects.

  2. says

    @ Etienne: Thanks for the good suggestions. You are absolutely right, there has to be a “business fit”, and it is the most fundamental elements to effectively control a supplier. Sometimes a background check with Glo-Bis is enough to see how big they are and how fast they grow.
    One of my friends told me about this dialog:
    The purchaser, very arrogant, says “So, we have represented more than 100,000 euros of business for you last year. What is your total turnover?”
    The supplier replies “60 million US dollars”
    The purchaser, unsure of herself: “Oh, then we are…”
    The supplier finishes the sentence: “Yes, a small customer. But it’s fine, if we keep meetings short.”

  3. Tom says

    Hi everyone. Looks like some great advice. I’m currently doing some study for becoming an import/export agent, and finding that the information is just not sufficient enough. These post’s here are providing a lot more real life experiences, which are great!
    I obviously don’t have my feet on the ground in china. So what’s the best method of getting my goods quality inspected? The same goes for using L/C, given I may only be making a small commission on the order acting as an agent.
    Also I’ve noticed a lot of agents charging a fee for their services to cover shipping as well as customs duties and taxes etc… . I know most of these agents would be getting a commission on the value of goods purchased anyway. I just need some advice on what the best fee structure would be. It seems as though if I shoulder the costs of all these things as well as insurance and only take 5-10% of the FOB value of goods, it would cost me more than I would make!

  4. Renaud Anjoran says

    Tom,
    If you don’t have on-the-ground China experience, you will have a lot of bad surprises in your activity as a sourcing agent.
    Regarding the fee structure, every sourcing agent has a different fee structure, it seems… You need to decide on something that suits your objectives.

  5. tom says

    Thanks Renaud, with the fees thats what I thought. As for the sourcing there is no way to start unless I start , right? I obviously will need to follow as much advice as possible as well as doing all my research regarding a supplier… All I need to know is, Will a quality inspection limit those surprises. Its not possible to get Chinese experience if I don’t get experience. I have to start this now.

  6. Renaud Anjoran says

    Tom,
    Sure, you can learn by doing. And sure, don’t let a factory ship the goods unless you are sure they are OK.

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