Updated by Neil
This chapter covers a few steps in the supplier process Approve Sample, Agree to Terms, Formalize agreement, and Pay the Deposit. It also describes the topic of negotiating minimum order requirements.
Compare the samples that you have ordered with your product quality standards.
The majority of small importers do not usually inspect the sample with sufficient care. You should review the sample carefully and thoroughly. Please make sure the supplier has made the product exactly as you envisioned it to be the look, function, performance, fitness, etc.. It would help if you contemplated what tolerances you would accept on measurements and what stress testing should the product be withstanding. You should make sure the packaging is immaculate. You need to add all the extra information to your specific spreadsheet.
Under certain circumstances, you might be asked to approve a sample that is not 100% as you instructed it should be. You should hear the manufacturer out and listen to the reasons as to why this occurred. It is sometimes not entirely practical or realistic to dye just a few yards of fabric in the exact color you want it to be, not a single level off shade. This is a valid reason, but there are specific inadequate explanations as well. For example, when they are confident, they will work out how to fix a glitch before they start production without any guarantee. Do not let them fool you with hollow promises and by taking dingy shortcuts.
At a certain point, you should make sure that you examine the packaging properly as well.
Once you have inspected the samples thoroughly, make a final decision based on the quality and last quotes provided. The model which you approve from the finalized supplier is called the approval sample or the golden sample.
Be sure still to maintain your relationship with the other two shortlisted suppliers. It will help if you kept them as a backup if something goes wrong with your preferred supplier. You might even need them in the future for a different product deal.
Negotiate Low Minimum Order Quantity
Usually, you would prefer to have a trial run with the product to see if it sells. Hence, making a small first order is a good strategy. You would not lose much if the product doesn’t sell, or you get negative reviews and want to make modifications.
If the manufacturer has never made your product before or hasn’t made one according to your instructions, it is better to make a minimum order first. You will want to authorize the production process. Sometimes if the dimensions are incorrect, the two parts of your product won’t connect, and you would have to scrap the entire batch. This sort of thing happens all the time. In this situation, using the confirmation sample is also a good idea.
However, the suppliers often have a minimum quantity set beforehand, below which they don’t accept orders, called an MOQ (minimum order quantity).
If the MOQ is hindering your plans, you may be able to get past this by first finding out why it is being applied:
Sub-supplier constraints- A general example is a fabric mill with minimum length requirements for dyeing a product. You could order more dyed fabric than you currently require and store it as inventory for future purposes. This will help you overcome the issue. You can also use the fabric for different styles.
Constraints with the final manufacturing process- Manufacturers, usually don’t agree on starting an entire project for a few volumes of products. For example, beginning an assembly of mobile phones for just 1,000 pieces. However, if you can convince them that you already have some success signs, they may provide you with sample quantities below the MOQ. An example of showing success rate is that your product has been selected for selling in a prestigious company’s store (for instance, Apple). Still, it is supposed to be tested in the marketplace first.
You’re too small of a company- If a supplier is refusing to provide orders below MOQ without a valid reason to reject your offers, chances are he is doing so because your company is not that well-established. Suppliers practice this to avoid dealing with small enterprises.
Agree To Terms
Make sure that you receive written responses, if possible, from a manager or a higher authority as you reach an agreement on each of the following details:
- Size of the order for your product.
- Price of each unit of the product and the cost of tooling (if any).
- Payment terms, for example, “30% after approval of a golden sample, 70% after shipment of entire order”, and currency terms. Connect payments with approvals of quality and on-time deliveries.
- If possible, quality control(QC) should be done in the form of an inspection checklist. Mention it clearly to the supplier what is not acceptable, such as delays in shipment of more than 10 days, major defects ranging above 2.5% of AQL levels, and failure in a lab test that asserts compliance.
- Confirm on the Shipping terms, including incoterm, such as “FOB Ningbo,” confirmation on loading port and receiving port (for sea shipments), lead time decisions, for instance, “45 days after deposit is received”, and penalties for late shipment should be enforced.
- Discuss the significant product specifications, including labeling and packing requirements (such as shipping marks on export cartons). If you are already prepared with a product checklist, refer to it in the purchase order (PO).
- It would help if you demanded the supplier complete his end of the deal and finish specific production tasks. For instance, sending a sample and sending the QC inspection report of their own with photos when 10% of the shipment is manufactured.
- Confirm that the buyer has a right to send inspectors at any time.
These are some additional points you should include on a purchase order, along with the standard:
- Your(the importer’s) full contact information including company name and logo,
- The supplier’s (manufacturer’s) full company information,
- Unique Purchase Order number, and corresponding PO if applicable,
- Purchase Order commencement date,
- List of the products by the quantity ordered, per unit price, and total price.
The following are steps you need to follow to formalize an agreement:
- Complete writing a purchase order (PO) form and then send it.
- You should receive a pro forma invoice (PI) from the supplier. Authenticate that the information in the invoice matches the PO. The pro forma invoice eventually becomes the commercial invoice.
- You should get the Purchase order and the Pro forma invoice signed by both parties and chopped/sealed by the supplier.
- Deposit the payment as per the terms you agreed on in the purchase order. This is explained in more detail below.
Pay The Deposit
- Generally, the buyer pays an initial payment of 30%. You should note that it is called a “deposit” but is rarely returned if something goes wrong. You should always approve all the initial samples, complete the specification sheet with intricate detail, sign off on the PI, etc., and only then make the payment.
- The suppliers mainly request payment to their accounts. You can be exposed to fraud, so you need to be careful with whom you give payments. You should only send money to the company that is distinctly mentioned in the contract and on the Pro forma Invoice (PI).
- You should be in constant communication with the supplier via phone call when the payment is passing. This is to prevent Phishing or any other cybercrime form where the hackers infiltrate the supplier’s email and then trick you into transferring money into their account.
- We have discussed this earlier in the negotiating strategy that the larger volume of the order you make, the more power you have to negotiate payment or any other terms bent towards your advantage. For instance, you can negotiate payment terms where you make a minimal first payment. You may also negotiate to split payments into three different parts, with the third payment coming only after receiving the goods. If you are a large buyer, it is advised by experts that you pay in RMB; otherwise, USD is the way to go for smaller volume goods importers
- The Payment Methods chapter describes in detail the various ways to make payment.
Monitor The Order
It would help if you made it known that you have an eye on the entire manufacturing process at all times. If they know you are paying attention to the order, they would be extra careful not to make any lengthy delays. It would be best if you held them accountable for their promises. Do not just communicate only when problems you find problems in the order; otherwise, they will withhold information from you.
Below is an example of the tracking sheet :
All components purchased
The buyer’s deposit was received in June. 8
All components received
Start of mass production
Our workshop is jam-packed
Production samples sent
20% of pieces are completed
Packing 80% done
- If your product is relatively new and has not been made in the supplier’s factory before, you should push for a trial order before commencing with production. It would help if you always tried to convince the supplier for a trial order before you agree to make payments.
- Always acquire written confirmations on the most important terms before you issue an order, let alone pay a deposit.
- It would help if you established the right incentives by making payments directly proportionate to approvals of quality standards and on-time readiness.
- You must document all essential specifications, tolerances, etc. in a separate spreadsheet and not approve samples.
- Pay attention to every detail of the production schedule.