Last week I received this question from a reader:
What are your thoughts about imposing fines on suppliers for late delivery and quality issues? Does it work or just causes more problems ?
My short answer is: yes it can work, but only if it is structured correctly.
You don’t want penalties to be so harsh that it seems unfair. But you want a system that has teeth.
Example: fine for late shipments:
Many buyers write something like: “5% penalty for each week behind schedule; after 2 weeks late the supplier will have to send the whole order by airfreight or the order will be canceled”.
Another option is this: “4% penalty for 1 week late, total 10% penalty for 2 weeks late, total 25% penalty for 3 weeks late, total 50% penalty for 4 weeks late”.
Example: fine for failed QC inspection:
In case of a failed QC inspection on your products, you can probably ask for a discount of 500 USD (usually the QC inspection will cost you around 300 USD, so that’s what you’ll have to pay for a re-inspection).
Of course, it should be included in the quality control plan you give the suppliers for signature (before issuing purchase orders).
Should you apply these penalties?
Not all importers can do it. There are actually 2 situations.
If you sometimes ask favors from suppliers (for example, if you change the specs at the last minute but you ask for the shipment date to be unchanged), you can’t hold them to a very high standard. In case the factory had some problems, told you in advance, showed some goodwill… You should be flexible.
If you are very organized on your side (which I strongly encourage) and you want your suppliers to live up to their promises: penalties should be systematically applied. They become anticipated by the supplier.
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Veronika,
Very true. Of course, if the buyer is begging for a supplier to accept his orders, there is no room for fines or QC inspection or anything sensible… Better avoid these deals.
Hello Renaud, nice post as always..!
I’d say it also depends on the buying power of the importer. If the order quantity and value is high, the supplier has a lot of motivation to abide by the terms.
Looking forward to the next great post!
Veronika
Renaud,
Always good blogs. Here is my experience- I managed from $100k to >$20M (annually) in buys from Chinese factories.
It was always straight-forward to impose fines for re-inspection when the goods failed the first inspection. If the factory pushed back, we stood firm and in every case the factory relented and paid the re-inspection fee. In fact, we typically had the factory pay the inspection company directly.
As for delays in production, this was more difficult. In many cases, the factory would know that we needed the goods, even if they were late, so they would refuse the fine. It’s a good idea, though- especially if you have the power advantage over the factory.
Cheers!
Peter,
Asking the supplier to pay re-inspections is quite standard. But sometimes the supplier will say “we’ll only pay 100 USD for it because that’s all we think is reasonable – you pay the rest.”
You are right, late penalties are more difficult to enforce.
I think punishment ‘MUST’ and they will consider serious. ( by the way, it should be BIG orders at factory for that )
Yes, I agree Eric. It is possible, for big orders.