How to pay chinese supplier against quality products when buying in China

I constantly receive the same question again and again from importers, hardware start up founders and retailers: « How can I secure my payment and my goods by leveraging quality inspection in China and do I implement it».

I don’t know if you already had this questioning but it seems many people know that quality control is existing and can be implemented in China but they don’t really know how to link it to their contract or their payment scheme.

Yet, this is not very complicated to implement a protection related quality by tying payment to quality assurance process. Below, I expose a few examples about how you can easily do it:

IMPORT FUNDAMENTAL PRINCIPLES

1./ Payment terms are not in favor to the buyer

As you probably know, payment terms to chinese manufacturer are extremely rare based on a 30 or 60 days terms. Most of time they are rather 100% payment before shipment with a split of payment 30-50% first as deposit at the beginning of ordering, then the remaining balance at the end of the production order and before the shipping. Sometimes the payment of the balance is settled at shipping time after the goods get cleared but this is less and less the case because in this situation, if the goods get cleared and buyer doesn’t pay the balance, it is just a headache for the manufacturer to get back the goods in China involving importing back the goods.

Because importers are supposed to pay for their goods before receiving them, it means that in case of problem on the cargo, it will be discovered too late at destination and once the supplier has been paid in full already.

2./ Chinese manufacturers extremely rarely give refund or compensation

I have rarely seen Chinese manufacturers to refund money or give compensation when an importer is purchasing goods from China. Of course, if you are Walmart this is a bit different, but if you are a SMB then it will likely not happen. See this post about why Chinese manufacturer are short term minded and will prefer to loose a client but keep the money rather than the opposite.

I have even seen in the past some manufacturer who received deposit and would not refund the deposit even the order would not be started yet claiming they have already started to work on it, so the buyers would have no choice than just loosing his deposit or to go with full order.

3./ Anticipation is the key

You can not expect to deal in China the same way you would deal in the west. As I always say, import operations are risk management. Whatever it happens you need to keep control on the situation. For example, you can not know what the future may be, but you can draft your contract properly from the beginning to anticipate what could happen in the future. I know that too many importers don’t have good contracts settle in place with their manufacturer and they can not do much against them in case of problem. Willing to enforce a contract in China, first make sure it is drafted properly.

TIYING YOUR CONTRACT TO YOUR PRODUCTION QUALITY

You have to understand something very important : you get leverage when you get money at your side. In short term, as long as you didn’t pay your supplier you will get listening. Once payment is done, your supplier may become deaf. Hence, this is before placing order that you should prepare your action plan. 

1./ Securing your deposit / down payment by auditing your supplier 

You have sourced a supplier and never work with it and they ask you 30% of your PO amount to start working on your production.  Before sending any money make your due diligence by auditing your chinese manufacturer. Audit in China can be done for less than 300 USD for basic supplier audit, and for less then 500 USD for extensive supplier audit. If you compare this amount to the 30% of your PO, you probably find out the audit cost is very tiny to secure a 30% down payment (usually it cost less than 10 times the cost of the down payment).

In some case if you demonstrate enough a good buying power, you may even negotiate with your supplier to pay for this audit. This is what walmart, costco do when a supplier wants to work with them: Costco or Wal-Mart will tell the supplier : «hey we have a strict process where you need to be audited before we work with you, and you have to pay for it"

If you are a small buyer and are ordering for a certain amount (let’s say 30 K USD), you can try to negotiate for those audit fees to be covered by your supplier in case you place order to them afterward and to pay at least half of those fees in case you don’t place order to them. For this, you will need to demonstrate that although being not a Wal-Mart, your company is serious, has process and expect its partners to take as much as risk as they take themselves.

Keep in mind that auditing supplier allow you to reduce risk on deposit, but it doesn’t totally eradicate it. Indeed, your supplier may have the best organisation and the best quality management system in place, other risks can still come out. For example, their cash flow or their financial health can be at stake. There are plenty of factories closing doors every year, and even some with hundred or thousand of workers working on production line a few weeks earlier.  

To reduce a bit the risk a bit more you can add up Credit Check Audit in your check list to verify the accounting of your supplier before placing order. Best way to verify financial health

2./ Secure your balance payment

Normally, your supplier will ask you to pay the balance of the PO when the order is ready to ship. Quite often they will not accept to ship the goods before getting their payment because this is too much risky for them. In case you don’t pay the remaining, they got no money and they got no goods. 

In short, this checkpoint remain one of the last chance for you to have control on your supplier because you still have the money in hand, supplier will still listen to you and will still have pressure on his shoulder as long as payment doesn’t get settle. Hence, if you have to ask for a reworking of your goods, or anything else this has to be done before payment.

Of course, you don’t want to pay to receive defectives or non conformities. 

a./ Tying your payment to the quality of your goods

A simple way to secure your order is then to send a quality inspector to verify the quality of your goods. On your side, you can condition the payment of the balance to a quality inspection report mentioning that everything is fine enough to be shipped. To do, you absolutely have to include this clause in your PO or contract. Quite often, the supplier will send you a dirty PO made in an excel file with no clause at all related to quality.

You can for example include in your PO : «  For buyer to release balance payment to vendor and shipping, a third party inspection company (Inspection Company name) will be appointed by the buyer will have to issue a quality inspection report with « pass" status and a defective rate less than X %. In case of failed inspection, vendor will have to implement necessary correction to the goods and be reinspected again for correction checking. Goods balance will be paid only once a quality inspection report with "pass » status is issued by the appointed third party inspection company. First inspection which cost is 288 USD is paid by buyer to the third inspection company (inspection company name), any other reinspection is paid by vendor to the inspection company (inspection company name ) ) »

With this kind of clause in your PO and with the fact to send an quality inspector at the end of the production, you demonstrate to your vendor that you are serious and experienced about what you are doing. This will help to increase the output of your order. 

Also, quite often what I do is to rewrite the PO in my own format using the information provided by the vendor, and I add up my own contract clauses in the document. Then I send the document in PDF to the vendor so they can not modify it. I then ask them to print the document, to sign and stamp on every pages using their official stamp. I ask the general manager to sign it, not the sales people, so that the people with the highest responsibility in the company is aware of the situation. 

To make sure the general manager identity, you can check on the business licence the name of the general manager (you can get access the business licence via a factory audit for example).

b./ Tying your payment to the conformity of your goods.

You can also do the same with product testing and certification (for CE, ROHS , REACH or any other testing certification which is necessary) : you can tie the payment of your balance to the issue of a pass certificate issued by a designated laboratory and with sample being picked up by a quality inspector. 

 It is important you designate yourself the laboratory because :

  • There are many labs which are not recognized by western custom
  • Some labs deliver some certificate against bribe from supplier

It is important you make the sample which will be tested to be picked up by a third party hand and not being sent by the supplier because if you give the opportunity to the supplier to send himself the sample, then he may select it and may send a sample made with a different material than the production one. Hence, the test and certificate would be pass but if the custom in your country draw a sample and analyze it, then it may not pass anymore and then you will get troubles.

You can for example include in your PO: «Payment of balance of the order is conditioned to the issuance of a pass certificate and test report for Name_of_certification. The test report and certificate have to be issued by laboratory Name_of_laboratory and tested sample have be drawn by a quality inspector from the inspection company Name_of_inspection_Company"

ANTICIPATE

Remember that you should anticipate and implement all those points at the beginning of the relationship with your vendor. Once your order is placed, it is already too late. Don’t forget to add up a few line to your PO who can save you a lot of troubles and a bunch of money.

When importing from China, the best you can do is to imagine the worst that can happen because Murphy law is still existing.

PUSH NEXT

In another post I will explain how you can use a Letter of Credit to tie your payment to the quality of your goods.

What is your experience and your opinion about quality control and payment of suppliers ? Did you have any experience related to payment and quality control ? I would be happy to know your story?

About Christopher Oliva 59 Articles
Christopher Oliva is an Engineer based in Shenzhen since 2008 involved in Product Development, Supply Chain, Sourcing, Quality Management and Manufacturing activities. With a Msc Electrical Engineering and a Business Administration background, an ISO 9001 Lead Auditor Certification, a Six Sigma Certification and a Quality Engineering Certification, he works as a consultant on mission and contract oriented to Product Development, Manufacturing Management, Quality Assurance & Quality Management System setup. He works in the product development and engineering field, and as well as an advisor and quality consultant for several quality control and quality assurance companies.