by Fredrik Grönkvist
We often tend to focus on what happens up until the point where the buyer has identified a suitable manufacturer, and is ready to place a first order.
In this two part guide, we explain how you shall manage the later stage of the process: before, during and after production. In the first part of Managing the Production Process in China, we guide you from the negotiation and signing of the Sales Contract and initial Deposit Payment, to Mass Production and Batch Sample delivery.
1. Sales Contract
The Sales Contract is the foundation for your first, and all future, production runs. The Sales Contract has two main functions:
a. Define the product design, quality and functions (to avoid quality issues due to misunderstandings and the supplier cutting corners)
b. Creates a framework for increased efficiency
Let’s begin with the first part. At this stage, you should have at least an alpha or beta sample, and a product specification tweaked according to the manufacturer’s capabilities. All relevant specifications and file attachments must be listed in the contract. There is no room for assumption, and leaving something out, regardless of how obvious it may be, will come back to haunt you later.
The second part is equally important, as you don’t want to renegotiate order terms every single time you make a purchase. As such, the contract must also include the following terms:
• Definition of defective product / list of defects
• Accepted Defect Rate
• Compensation Terms
• Payment Terms
• Minimum Order Quantity Requirements
• Bank Account Details
• Applicable Technical Standards & Safety Standards / Directives
• Labels & Graphical Files
• Quality Inspection
• Compliance Testing
• Export Packing
• Production Time
• Late Delivery Clause
• Production Plan (1st Order / Consecutive Orders)
After negotiation, the Legal Representative (as specified on the Business License) shall sign the contract, combined with the company stamp. Don’t accept digital copies, but require the supplier to send the actual paper copies. Now, it’s time to move forward.
2. Deposit Payment
Before your supplier does anything, you may transfer the initial deposit payment. In order to avoid payment fraud, you shall only transfer the funds to the bank account specified on the Sales Contract. The beneficiary details must be correct, as the receiving bank in China will otherwise return the money. To avoid such a waste of time, you need to know the following:
a. Beneficiary name: Exactly as specified by the supplier. Chinese company names are often quite long, and you cannot cut it in half, even if your bank doesn’t allow you to enter the full name. If that is the case, enter the remaining characters in the message field.
b. Beneficiary address: Same goes for the beneficiary address. Don’t leave anything out, or the payment may be returned by the Chinese bank. If the address is too long: try to shorten it a bit (i.e., 333 Hao Zhang Yang Road can be shortened to 333 Zhangyang Rd).
c. Bank Account Number: Same as specified by the supplier. Chinese bank accounts just have one account number, for both international and domestic use (unlike, for example, the EU which use IBAN for international transactions).
d. Beneficiary Bank Account: You may either input the SWIFT code or Bank name combined with branch and bank address.
e. Currency: United States Dollars
Right after making the payment, send a so called ‘payment proof’, which can be a transaction record from the business internet bank, directly to your contact person. Request them to confirm the bank account details in the ‘payment proof’, just in case your accountant missed something. Follow up with the supplier until they confirm the arrival of the deposit payment. This should happen within 2 to 3 banking days. Upon arrival, notify the supplier that the production time starts counting from today, and that you expect the goods to be completed and ready for inspection on the set deadline (again, as specified in the sales contract).
3. Mass Production
The mass production phase begins at the very moment the supplier confirms the arrival of the deposit payment. Time is ticking, and the supplier is now to execute the steps outlined in the production plan. The process varies depending on the product, but this is what it might look like:
• Purchase Components & Material: 10 – 20 days (from subcontractors)
• Process Components & Materials: 10 – 15 days (in house)
• Batch Sample Completed: 1 – 3 days (Recommended for the 1st batch)
• Assembly: 5 – 8 days
• Packing: 1 – 2 days
While you should have received prototypes before you decided to go forward and place an order with the supplier, it’s still highly recommended that you, at least for the first batch, require the supplier to first produce a number of batch samples, for your approval – before mass production proceeds. Indeed, this may put production to a halt, especially if such samples are to be delivered to your office (rather than approved on site by an inspector). Yet, misunderstandings and neglect are common, and this is your last chance to prevent quality issues from spreading further.
You may also request general status updates, and photos, on a weekly basis. When the batch is nearing completion, you need to get a confirmation on the inspection date. Such dates are prone to change, but notify your quality inspection well in advance, and start working on inspection checklists as early as possible. We’ll cover that in detail in step 4, of Managing the Production Process in China Part II.
Note: The production plan assumes that all tooling (i.e., Injection molds) is already completed prior to mass production, as this is required to make pre-production samples.