A contract is an agreement between the supplier and the customer which should define expectations and assumptions from both parties. When done properly, contracts are essential for creating structures and recording crucial information regarding timelines and workmanship.
In full disclosure, few companies at all will ever be able to legally make a contract binding, and Chinese suppliers will not offer much credence to any legal document. The most significant reason to create the document was to initiate an exchange of ideas at the beginning of a brand new partnership to (a) record the most critical details for the launch of your product and for regular supply chain needs to ensure you can (b) your business relationship begins on a positive note.
Here are six suggestions for things to consider when structuring agreements between contract manufacturers in Asia:
“Quality” is a subjective term only brought into focus with technical details and measurements. The concept of workmanship is usually understood different between a vendor and a client. Clear agreements regarding quality assure that the final product is manufactured in accordance with established quality standards. Both parties should agree how quality will be assessed, examined, and what degree of quality is acceptable and unacceptable. There are a variety of standards regarding fit and finish, performance, and packaging , which could be classified as categories such as “minor” as well as “critical.” The agreements should cover these as well as frequencies and the conditions to be able for factory audits as well as pre-shipment inspections , or PSIs. With travel by company personnel nearly impossible, third-party sources and QC agents are a good idea. Engaging a China sourcing agent is an effective tool for ensuring high-quality control during pandemics.
Timing AND FULFILLMENT
A contract manufacturing agreement must include specific terms describing the timing of production runs as well as delivery. If penalties for late delivery dates are mentioned, they should be explained that this is due to your brand being penalized by your customers. Production schedules are usually unplanned by the manufacturers and are based on the priority given to high volume customers. Delays can last for more like months than just days particularly during busy times like Chinese New Year and prior to Black Friday.
Modifications to Products
Modifications from both sides are common especially during the initial production runs. Brands should be solely responsible for any changes to design and materials. As changes from original drawings are made, it could be difficult to determine who owns any intellectual property rights to the designs: the buyer or the supplier. Be aware of who is responsible for the new tooling or development work. A detailed written agreement defines who owns IP rights in certain situations. This offers additional security to businesses concerned about IP theft.
The actual cost of manufacturing is subject to fluctuations which means the factory may be able to raise costs even after negotiations have begun. Factors such as fluctuations in currency as well as material and the cost of labor can significantly impact production costs. While tariffs can significantly affect landed costs they should be treated separately from the manufacturing cost.
The rising costs of manufacturing are worldwide and not isolated to China. Contracts should include the specifics of how and when the manufacturer may alter costs from the original quotation. In normal times, it’s not unusual to request price incentives for volume or tiered pricing when possible that reward promises of quantity and goals. Without such an agreement it’s not usually a breach of contract to escalate prices until the purchase orders has been made and accepted.
Service levels are broad based on aggregates and the results of all of the above over periods of time. In Western traditional usage, they are typically measured as KPIs. Agreements should also articulate whether or not you intend to review these at what frequency, and any corrective measures or penalties to be implemented if the level of service is not in line with accepted standards. Conversely there should be some kind of incentive or reward for the service provider should KPIs meet or exceed established benchmarks.
The FINALIZATION OF THE CONTRACT
In the event of negotiating an agreement with a manufacturer, there are a few suggestions to consider prior to having both parties sign on the”dotted line. The contract should be written in at least English as well as Chinese to avoid any misunderstandings due to language differences. When the contract is ready for signing, the person signing it from the manufacturer’s party must be a factory owner , or at a minimum an executive manager – not a salesperson, or another factory employee. The contract should then be approved by the factory and then receive its seal of approval, also known as “chops” that is a legally binding act in China.