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.
Part I: Sales Contract, Deposit Payment & Batch Samples
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 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.
Part II: Quality Assurance, Balance Payment & Shipment
This is the 2nd part of Managing the Production Process in China. In Part I, we covered the procedure from the negotiation of the Sales Contract and Deposit Payment, to Mass Production and Batch Samples.
In this second part, we guide you through the remaining steps of the process, including Quality Inspection, Compliance Testing, Balance Payment and, finally, shipment.
4. Quality Inspection & Compliance Testing
Now it’s time to verify that the products are manufactured according to the specification, and in compliance with all applicable safety standards and labelling requirements. It’s a two step process, as explained below.
You may begin drafting a Quality Inspection checklist well before you even have a supplier. The purpose is to execute all tests necessary to verify that the goods are manufactured according to all technical specifications, listed in the sales agreement. Most likely, you’ll hire a China based quality inspection agency to carry out the inspection in the factory, on your behalf. However, it’s your job to provide them with explicit and clear checklists. Yes, very often they can provide detailed templates, but don’t make any assumptions. The inspection will be carried out according to the protocol.
As mentioned in Part 1: Sales Contract, all applicable standards and regulations must be specified in the contract to begin with. However, you should also contact a product testing company (i.e., SGS or Bureau Veritas) a few weeks before the goods are completed to confirm price and sample delivery address. You must also instruct your quality inspection agent to collect and submit samples, directly from the factory, to the testing company. Don’t entrust your supplier to do this for you.
Note: Don’t keep the inspection and compliance test a secret. Suppliers are more likely to adhere to your specifications and quality requirements if they know that you will check up on the goods – prior to the balance payment.
Most buyers choose to send the inspector once all products are fully assembled, and 50 to 80% is packed. As said, the inspection is carried out according to the protocol, with the result usually delivered within 24 hours. This is what you should expect from the QC agency:
1. Quality Inspection Report: Contains all test data, including measurements and other results, compared to the ‘required result’
2. Images & Video: Showing functions, defects and testing procedures
The inspection agency shall also submit batch samples from compliance testing at this time, and you shall contact the testing company directly (unless managed by your QC agency) to confirm the arrival, and final testing cost. The test is to be carried out immediately after you have paid the testing company.
Upon completion, you now have the data you need to decide whether to approve or reject the batch. You are, most likely, forced to deal with a number of (hopefully minor) defects. If you approve both the quality inspection report, and if the test reports comes back with an approval stamp – you can now move forward to Step 5.
Note: The compliance testing process always exceeds the production time, and may add on another 1 to 4 weeks. When importing certain products, for example textiles and apparel, you may collect material samples much earlier in the process, and thereby save weeks. However, some products must be tested and certified as ‘assembled units’, which is the case for electronics and toys.
5. Balance Payment
There is no return after you’ve settled the balance payment. At this stage, you must be sure that the products match your quality requirements, and are made in compliance with all applicable regulations in your market. However, if there are any issues that must be corrected, hold on to the balance payment until said corrections has been made.
Once again. Pay the to the right bank account, and keep track of the details. Send a ‘payment proof’ and follow up until the payment is confirmed by the supplier. These days, most suppliers require payment before the ship to the port of loading. However, the specific terms depend on what you’ve negotiated in the contract. Some suppliers may also accept balance payment after sending the bill of lading copy, but not the original document (which is required to release the cargo).
The exact process depends on the incoterm, specified in the sales contract. Below follows a summary:
EXW: The cargo is made ready for pickup at the supplier production facility. Your freight forwarder must take care of transportation to the port of loading, in China, and all export clearance procedures. I don’t recommend EXW under most circumstances, and it’s rarely more cost efficient.
FOB: The supplier takes care of delivery to the port of loading, and export clearance. However, you must book freight from the port of loading (e.g. Shenzhen) to your destination.
CIF: Everything included in FOB, and shipment to the Port of Destination. However, excluding port charges and inland transportation in the destination country. Port charges are often several times higher than the sea freight charge when shipping LCL (Less than Container Load), so be careful.
DAT: Everything included in CIF, and including Port Charges in the Port of Destination. However, inland transportation is not included.
DAP: Everything included in DAT, and including inland transportation to your office or warehouse.
That being said, before you can release the cargo, the supplier, or the freight forwarder, must send the freight documents, which includes the Bill of Lading, Commercial Invoice and Packing List. This must be done at the latest two weeks before the cargo is expected to arrive. For importing businesses based in, for example, Singapore, Malaysia and Australia, the documents must be delivered well before that.
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