In this episode…
In episode 65 we discussed the different supplier options open to buyers who’re sourcing from China. One of the options is to do the sourcing yourself. Many importers want to pursue this, so we’re creating a mini-series of episodes that explores how to handle the sourcing process from China yourself with tips and best practices from Sofeast’s CEO Renaud Anjoran.
In part 1 of the series (episode 69), we looked at the early stage of sourcing where you find your potential suppliers, verify them, and cultivate backups once you’ve settled on a first choice.
Now, here in part 2, we’re going to explore the key terms you need to negotiate with your chosen supplier, how to retain some leverage over them and control your project, and how and why the quality standard and samples are absolutely crucial for assuring you get the products you expect from your supplier once they start production.
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00:00 – Introduction.
02:20 – Why is it important to be organized and avoid looking too inexperienced when negotiating terms with a new supplier? Don’t make it too obvious that you are green, so do the research about your product category before contacting potential suppliers otherwise you risk being scammed or scaring away great suppliers (who may either may reject working with you or give your orders very low priority compared to those from better-established customers due to concerns over the level of business you can give them).
05:27 – What terms do you need to negotiate?
- 05:50 – The price of the goods – A key term to negotiate, this impacts what you sell at!
- 07:02 – Lead time – When will the supplier be busiest? This should influence when you place your order in order to receive it on time (such as before Christmas). More rounds of samples will delay you settling on a final PP sample. Bear in mind that sea shipment may take 9 weeks instead of the 5 it used to, so add some padding of extra lead time to account for these delays.
- 09:58 – Incoterms – FOB gives you control over the shipping and allows you to select your own freight forwarder or 3PL. Beware of CIF. It may sound tempting to get ‘free’ delivery these days especially (late 2021), but you may be at risk of a forwarder charging you exorbitant local fees for unloading, etc.
- 10:53 – IP protection – If you have a unique product or one with custom functionality you need to stop the supplier from being able to sell it to others so signing an NNN agreement and product development and/or manufacturing agreement with the supplier is a helpful way to protect your IP.
- 12:11 – Transparency over the supply chain & access to the manufacturing site – Keeping your supply chain information from you helps suppliers lock you in as it’s harder to switch to a new supplier if you have to redevelop everything and it also obscures the true costs of everything from you so you don’t know their margin. To take control, you may use a manufacturing agreement to specify that no one unauthorized subcontracting is allowed, for example. Access to the site means that you’ll be able to send inspectors at any time. Buyers placing larger volume orders will have more luck in negotiating these.
- 15:35 – The quality standards – Give the supplier clarity over your quality standard by negotiating what is and is not acceptable with them, such as the size of a dot that can be allowed in ceramic products. This should also include packaging, as the supplier needs to be in agreement with you over what packaging is appropriate and acceptable to protect your products.
- 17:53 – Payment terms – How are you going to pay and when? T/T payments are commonly requested by suppliers. Inexperienced or over-confident buyers may pay 100% in advance, but this is a terrible idea. Negotiate a 30% or lower advance payment. For air shipment, you will need to pay in full before the plane departs, but make sure you do a final inspection before the goods are shipped. For sea shipment, usually, buyers should pay the supplier after shipment (once the buyer provides shipping documentation), although with the difficult state of shipping at the time of recording, many suppliers insist to be paid in full before the goods are shipped because there are often delays and the goods sit in port for some time, affecting their cash flow a lot.
24:29 – How to keep leverage over suppliers? You have legal and non-legal tools to keep leverage over your suppliers. Legal tools include a fully enforceable manufacturing contract/agreement that will be in Chinese. It is relatively easy to scare a Chinese supplier who’s in breach of their contract by getting a local lawyer to send them a letter on official letterhead. Reasonable Chinese suppliers are used to signing a contract. If they resist a reasonable contract it’s a red flag.
28:09 – What payment tools do we have to keep leverage? As long as you owe money to the supplier you have some level of control over them. Try to retain a substantial amount, 10-15% perhaps, in your hands until you are sure everything is OK otherwise less honest suppliers could play games, especially if you don’t have an agreement in place. For example, when shipping FOB you may choose to pay the final 10% after shipping upon receipt of the bill of lading. If you pay in full before goods are shipped and there are issues with the products once they arrive, getting retribution may be incredibly hard. Even if the supplier agrees to produce more, perhaps at a discount to account for the initial defectives, how long will it take for them to arrive, and can you trust that they’ll be OK this time?
35:36 – Keeping leverage over your tooling. If you’re manufacturing a custom product and have invested in tooling for that, your contract should state that you own the mold and should contain the option for you to pull it out from the supplier at any time under pain of litigation if it is not allowed by them. If not, some suppliers may attempt to retain the tooling in order to keep leverage over you, as they know manufacturing new tooling is expensive and time-consuming and they’re also able to produce your product and sell it in competition to you if they’re particularly unscrupulous.
38:20 – Paying by letter of credit. Small buyers can’t use these, but payment by letter of credit may be possible for orders over $50,000. An advantage is that no advance payment needs to be sent to the supplier. They’re becoming less common, but some suppliers will accept them if they can accept that it’s not great for their cash flow.
40:49 – In what ways should you describe what you’re expecting to receive from your supplier? Your quality standard shows your requirements, what you want to receive, and what is not acceptable. Approved samples are also important, especially in textiles and apparel. For electromechanical products, you need to consider functionality, safety, and aesthetics and define the testing required. It’s important to document everything to avoid unpleasant surprises.
For packaging, this also applies. The supplier needs detailed photos and information about the packaging materials, colours, and design, especially if it’s retail packaging as this is ‘part of the product.’
When you have pre-production prototypes check them for defects and document what is and is not acceptable with photographs, such as ‘this blemish size is not acceptable.’
Everything should be in a master document, not sent separately in emails, WeChat messages, etc. This makes it harder for inspectors to check the quality during production as it’s hard to collect the information they require about your quality standard if it has not been collected neatly.
If the buyer doesn’t specify clearly what quality is expected of the supplier, quality issues are on you as well as the manufacturer (especially if they’re ISO 9001 certified as they should be collecting requirements from the customer).
49:13 – Wrapping up.
- Negotiating With Chinese Suppliers: The Terms you Need to Discuss
- How To Keep Leverage Over Suppliers
- Pre-Production: Describing What You Want
- 9 Things Small Importers Can’t Negotiate With Chinese & SE Asian Suppliers [Podcast]
- Incoterms – what are they?
- How To Create A Valid Manufacturing Contract In China To Protect Your IP
- IP Protection in China when Developing Your New Product [Importer’s Guide]
- How to Pay Chinese Suppliers by T/T Payment (Bank Wire Transfer)
- How to get a Chinese supplier to accept a letter of credit
- How to move Plastic Injection Molds between China Factories [10 Tips]
- Documenting Your Company’s Quality Standard into the Details
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