Six key things to confirm with suppliers before mass production
Before mass production, communication and confirmation with suppliers is crucial. Although the supplier assessment can initially screen the cooperation object, but before payment, still need to pay attention to many details and reach a clear agreement to ensure smooth cooperation.
I. the form of invoice (PI) confirmation
Order, the first task is to require the supplier to send a form of invoice (PI). PI is a detailed preliminary bill, covering product and pricing information, usually with the function of the sales contract, because most suppliers do not provide another contract. If there is no reliable contract between the parties, the PI should be filled out with complete information to ensure that you receive the correct product on time.
Upon receipt of the PI, the content should be carefully checked, including the price of the product based on the trade terms, the quantity of each product, size, weight, color, material, packaging options, etc. In addition, the PI should contain the supplier’s bank information, payment terms, and the effective date of the price. In addition, the PI should contain the supplier’s bank information, payment terms, and the effective date of the price, which is critical due to the fluctuating exchange rate between the U.S. dollar and the Chinese yuan.
After verification and receipt of the deposit, the supplier prepares the materials and starts production, with the delivery period counting from the date of deposit arrival. Once production is complete, the supplier issues a commercial invoice (CI), which is the final version of the PI. After confirming that the charges are correct, you pay the balance of the invoice amount before the supplier ships the goods. The invoice is also used for import and export customs. Always make sure that the invoice amount is the same as the actual amount paid, and do not misrepresent the value in order to pay less import tax to avoid legal risks.
II.Signing a Non-Disclosure Agreement (NDA)
If you own the intellectual property rights to a unique design or new product, it is critical that you sign a non-disclosure agreement (NDA) prior to production. Some suppliers may overproduce and then disclose product or business information and resell the excess product to others. Most Chinese suppliers do not ask for NDAs on their own initiative, so it is recommended that you prepare them yourself. The agreement can specify the information that suppliers are prohibited from sharing, such as price and design, or stipulate that the product should not be used for marketing displays, and it can set the amount of damages for breach of contract.
However, some Chinese suppliers have refused to sign NDAs for fear of being wrongly accused of violating them, especially for fear that others will bypass them and plagiarize. If this is the case, it is advisable to drop these suppliers. Non-disclosure agreements are effective in preventing suppliers from copying products or disclosing information, and will be renewed even if the supplier needs to find another factory to produce some of the products.
However, it should be noted that after the public release of the product, others can easily access and copy, at this time the confidentiality agreement is difficult to play a role, the most effective way to protect intellectual property rights is to register a patent in the country of sale.
III.the delivery time and delivery time is clear
Delivery time is the length of time from the order to the product ready for shipment, the order should be carefully checked with the supplier to avoid temporary changes in the production plan. Usually, the supplier will not be clear in the PI delivery time, which is prone to cause problems. If you are pressed for time and cannot tolerate delays in production, do not just verbally inform the supplier of the delivery time requirements, but should include the agreement in the PI and set up a breach of contract clause to specify the amount of compensation if the supplier fails to complete the production on time. If there is no detailed agreement, you will not be able to compensate for the delay, you can only accept the delayed delivery.
Delivery time is the time it takes for the goods to arrive at the specified location from the time they are shipped. For urgent shipments, sign a just-in-time delivery agreement with your supplier or transportation company (if you use your own freight forwarder). In practice, the main purpose of a just-in-time agreement is to urge the supplier to deliver the goods on time, not to be compensated for delays. The agreement is only valid if you can hold the supplier accountable, otherwise it is just empty words. In China, especially for small orders, it is more difficult to sue the supplier.
It is recommended that old suppliers can be restrained by stopping future cooperation, if they delay and refuse to pay compensation, the loss is huge; for new suppliers, it is wise to keep part of the payment balance until the goods are received on time, although it is not easy to persuade the supplier to accept this condition.
IV.the quality requirements and defective products to determine the solution
Allow the existence of certain defective products, but the defect rate must be controlled within acceptable limits. Different product defect rate standards are different, most low-value ordinary products 5% defect rate is acceptable, while the defect rate of high-value products should be as far as possible for 0. If there are quality concerns, before placing an order with the supplier to clarify the types of defects and defect rates acceptable.
If the defect rate exceeds the standard, you have three options for a solution:
- Duplicate the entire batch and re-inspect it.
- Hire someone to select the defective product and replace it at the supplier’s expense.
- Claim compensation only.
Note: Before placing an order with the supplier to clarify the defective solution and compensation requirements, to avoid bad suppliers refuse to communicate.
V. Choose the payment method
In China, most suppliers accept U.S. dollars as a form of payment. Common methods include wire transfers, Western Union, PayPal, and letters of credit. Below is a detailed explanation of these payment methods:
(i) Telegraphic Transfer (T/T)
A wire transfer, or Telegraphic Transfer (T/T), is a money transfer operation through a bank. You can visit a bank counter or make payment arrangements through its official website. Depending on the country and bank to which you send the money, it may take 1 to 7 business days for the payment to arrive. Each transfer costs around 20 to 50 USD. If you are unable to transfer money through your bank’s website, you can also try using third-party wire transfer services such as Veem.com, transferwise.com, etc., which usually offer a more convenient online transfer experience.
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(ii) Western Union
When it is not possible to pay Chinese suppliers directly by wire transfer, Western Union is an alternative, especially for amounts less than US$5,000. However, there is no third party to secure the transaction, either by wire transfer or Western Union. You may not be able to get a refund if the vendor fails to ship the goods or if the quality of the goods is not as expected. Therefore, it is important to carefully verify the supplier’s information and reputation before making a money transfer.
(iii) PayPal
PayPal is a payment method that can effectively secure the transaction, but it will charge a handling fee of about 4%. When the order amount exceeds US$3,000, the handling fee will be relatively high. However, not all Chinese suppliers accept PayPal payments because they are concerned that buyers may fraudulently request refunds after receiving the goods.PayPal determines whether the goods have been delivered based on tracking records. Most Chinese suppliers may refuse to accept PayPal payments if they are using sea or air transportation methods that do not have a tracking system. When purchasing goods from Alibaba suppliers, you can reduce your risk by placing an order through the Trade Assurance service. If you want to use a credit card for payment, you can choose PayPal or Alibaba’s Trade Assurance Service, while wire transfers and Western Union do not support credit card payments.
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(iv) Letters of credit
A letter of credit may not be appropriate for people who are new to the import/export business. It works on the principle that the buyer does not have to pay in advance, but rather the bank guarantees that the supplier will receive payment upon shipment or arrival of the goods at the port. This payment method solves the trust problem between buyer and seller and reduces the pressure on the buyer’s cash flow. The buyer does not have to pay anything to allow the supplier to start production. However, the operation of the letter of credit is relatively complex and requires a certain degree of knowledge and experience in import and export business.
VI. Negotiation of payment terms
Payment terms are critical to the continued development of the business, and good payment terms can greatly assist in cash flow management. The essence of trade lies in investing in a batch of products, making profits after weeks or months of manufacturing, transportation and sales cycles, and then investing the profits to buy more products. Once the business is on track, consistent cash flow becomes extremely critical. As a result, many wise buyers negotiate with suppliers for more favorable payment terms. Here are four main ways to negotiate payment terms:
(i) 30% deposit and 70% balance before exporting
This is a type of payment terms acceptable to most Chinese suppliers. That is, a 30% deposit is paid at the start of production and the remaining 70% is paid before the goods leave China. Considering that the manufacturing process usually takes about a month and shipping from China to the U.S. takes 30 to 40 days, this means that you will need to make a large payment a month or two in advance before selling the product.
(ii) 30% deposit, 70% bill of lading payment
Another common practice is to pay a 30% deposit to start production, and then pay the remaining 70% when you pick up the goods. This way, you do not have to pay the entire balance before the goods arrive at your home port. Upon payment of the balance, the supplier will provide you with a bill of lading, which you can use to collect the goods at customs.
(iii) No deposit required, full payment by bill of lading
If you have a very good relationship with your supplier, you may even be able to start production without having to pay a deposit, and simply pay in full when you receive the bill of lading. However, such payment terms are less common and are usually based on long-term cooperation and a high degree of trust.
(iv) O/A payment (Open Account, i.e. payment after receipt of goods)
O/A payment, i.e. payment after receipt of goods, sometimes even allowing payment 15 or 30 days after receipt of goods, this model is widely used by many large retailers. However, how do suppliers ensure that buyers can pay on time under this payment model?
The mechanism usually involves export insurance. To protect their interests, most suppliers purchase export insurance for goods exported from China to overseas, usually through reputable insurance companies such as CITIC. These insurance policies provide security for suppliers: if a buyer intentionally defaults on payments or suffers an inability to pay, such as bankruptcy, the supplier can receive compensation from the insurance company for about 80% to 90% of the value of the order. This not only mitigates the supplier’s financial loss, but also poses a potential threat to the buyer’s credit, as defaulting on payments will seriously affect their business reputation.
Before a supplier agrees to adopt the O/A payment model, the insurance company will conduct an exhaustive examination of the buyer’s business background and set a credit limit for the buyer accordingly. This credit limit ensures that the supplier will be able to receive payment in a more secure manner if the order amount falls below the limit.
It is worth noting, however, that not all Chinese suppliers are willing to accept such delayed payment terms. This depends on the supplier’s own business situation, product category and competitive market situation. For example, in highly competitive product areas such as colored steel plates, where suppliers’ margins are usually only about 5%, they may offer more favorable payment terms in order to win orders, such as allowing 70% of the balance to be paid after the goods arrive at the port of destination. And in cases where buyers’ orders are large, such as up to tens of thousands of dollars per order, suppliers also tend to offer more flexible payment terms to attract buyers to place orders.
I hope this article has helped you to feel more confident in your decision making. If you have questions about the topic of this article, feel free to share them in the comments below.