by Steven Chow
You found a Chinese supplier at a trade show, and the company looks good and professional. You placed an order, sent the payment and now wait to receive the products. However, even after a couple of months when your stock and inventory are running low, the products are not delivered.
I often receive emails from frustrated buyers, asking me to assist them to speed up delivery from their suppliers. To solve this issue, first we need to understand what really caused the delay.
There are four main reasons why shipments are late.
1) The order is too small for the supplier.
Many buyers try to find big and established suppliers, despite their own business and orders being small. They do not realize that big suppliers are busy and often do not give importance to small orders.
One of my clients from Lebanon has been buying car mats from a decent-sized supplier in Zhejiang province. They buy one 20-foot container every month. The order size is not big, but not too small either.
The cooperation was good, until early 2012 when orders started being delayed. The situation went from bad to worse in subsequent months. The buyer became frustrated and puzzled by why all of sudden, the supplier was unable to deliver orders in time.
My company did some research and found that they received a large contract (about $10 million) from Kmart. Now all of their production lines are occupied to produce the order from Kmart, and orders from small and medium sized buyers have to be postponed. The owner of the factory hopes to set up a new workshop to increase production capacity, but it cannot be done overnight. They need to buy land, equipment, and hire and train skilled workers, all of which might take months if not years.
2) The contract does not include a penalty clause.
Most buyers underestimate the power of a contract. Aside from being used in a lawsuit as evidence of mutual agreement in all aspects of a transaction, more importantly, a contract can be used as a deterrent. The contract sets boundaries and limits on what is acceptable and what is not.
Here is a good example of a late delivery penalty clause:
"Should the Seller fail to complete the inspection procedure of the goods, the Buyer shall agree to postpone the delivery on the condition that the Seller agrees to pay a penalty which shall be deducted when the Buyer remits the payment of the goods.
The rate of penalty is charged at 2 percent for every 5 days, odd days less than 5 days should be counted as 5 days. But the penalty, however, shall not exceed 50 percent of the total value of the goods involved in the delayed delivery.
In case the Seller fails to make a delivery 25 days later than the time of shipment stipulated in the Contract, the Buyer shall have the right to cancel the Contract and the Seller, in spite of the cancellation, shall nevertheless pay the aforesaid penalty to the Buyer without delay within seven working days after the cancellation of the contract."
With the inclusion of such a clause in the contract, the supplier will think twice before they delay the delivery.
3) The supplier is a trading company with no control over production.
Recently we were inspecting kitchen products for a client in Shandong province. The client ordered six containers from the supplier, and the supplier bought the products from three or four factories. The order was delayed by five months.
At trade shows, many trading companies present themselves as factories. So without actually visiting the factory, you cannot tell if they are trading companies or factories.
Trading companies and factories have their advantages and disadvantages. Good trading companies can manage the supply chain and production effectively and smoothly, but it is easy for a trading company to mess things up.
In our case, the trading company lost control of their associate factories, which caused the five-month delay.
4) Goods are stuck in customs.
Getting products cleared by China customs before they are loaded on to the ship can also cause delays. Usually, products get stuck in customs due to the following three reasons:
a. Incorrect HS code
For most products exported, suppliers can get a tax refund of up to 17 percent from the government. The refund is based on the HS code of the products, because of which many suppliers use an incorrect HS code, just to get a higher tax rebate rate.
For example, door mats have a rubber back (70%) and a carpet top (30%). If we use the HS code for rubber, the tax refund rate is 9 percent, but if we use the HS code for carpets, then the tax refund rate is 17 percent. As the products are mainly comprised of rubber, we should use the HS code for rubber. However, many suppliers will use the HS code for carpets for a higher refund rate.
When such misleading classifications are caught by customs, they will detain products until the supplier corrects the HS code and pays the penalty. This procedure, as well as the investigation, could take months, during which time the products are stuck in customs.
b. IPR infringement
Buyers should ensure all logos and brands they use on their products exported from China are accompanied by relevant certificates.
We exported gift products for the US baseball team, SF Giants. The logo of their sponsor, Toyota, was printed on the gift items.
During customs clearance, we were asked to submit a letter from the brand owner, Toyota, authorizing us to use their logo, and the products were detained due to suspected IPR infringement.
We then contacted our client, a gift promotion company that got the order from a Toyota dealer in California. Our client in turn contacted the Giant team and the Toyota dealer association.
After 10 days, we got the authorization letter, which we submitted to customs. The products were released but we missed the delivery date.
You can access China customs' website for IPR records here: www.haiguanbeian.cn/applyrecord.
c. Incomplete or incorrect shipping documents
Shipping documents are prepared by suppliers and sent to shipping agents, who in turn send them to custom house brokers for customs clearance.
A mistake on these documents could delay customs clearance and therefore shipping. If there are inaccuracies, the supplier needs to correct and resend the documents.