As a matter of fact, knowing how to prevent unnecessary quality issues or defects during production and before QC inspection/shipment is vital, especially when dealing with Chinese/Asian manufacturers.
When the goods have been shipped out, there’s a surprisingly high chance that you would not be compensated even though detailed terms and conditions are written in black and white.
For some common reasons within China’s supply chain industry, as mentioned in our previous USE CASE articles, you will find yourself being in a situation in which you have to compromise between accepting defective products or financial losses.
In addition, it’s very easy to get yourself trapped in a never-ending negotiation for nothing real beneficial to you without proper quality risk management strategies.
One of our new clients (who was seeking solutions) got involved in a situation like above, lacking strategic procurement and contract management. The order was placed with only some basic trading terms written in PI and a Golden Sample (also commonly known as Pre-Production Sample) as an indicator/QC standard. In this case, they had no enough legitimate power to negotiate for reasonable and legitimate compensation to cover at least a part of the financial losses from the manufacturer.
For this reason, we are going to provide a practical step-by-step solution with details in this article.
Here’s one you should bookmark:
1．The use-case scenario: compensation for quality issues from manufacturer
Our client expected to receive the purchased products as the Golden Sample provided as the QC standard.
Unfortunately, the reality wasn’t going like that. After selling to the end customers, they received complaints about severe visual quality issues (damages and scratches on the surface).
When our client discussed with the manufacturer for a solution and compensation, the manufacturer was not willing to compensate for the financial losses as they didn’t see it different from the Golden Sample. Therefore, they didn’t consider it a quality damage issue.
In the end, the manufacturer only promised to “try” to improve their QC standard in future orders, leaving the client no choice to bear the financial losses and accept the visual damage.
In general, the quality defect can be classified into three main categories: Critical, Major, and Minor.
Some buyers and suppliers intend to follow general ISO AQL (Accepted Quality Level) standards to monitor their quality control. However, the definitions critical, major and minor damages are still open for discussion. There is no one world market standard clearly prescribed in any standardisation.
From purchasing perspective, there could be differences in acceptable quality depending on the range and positioning of their brands. Obviously, premium quality products have higher standards compared with random marketplace products. Every company has different QC standards to get the best outcome reflecting their brands’ value, products, or company’s characteristics and vision. Based on ISO standard as a secondary, this can be higher or lower.
In this situation, our client classified the visual damage as a Major defect based on their brand guideline, which is a higher standard than what the manufacturer would judge to be the general standards.
2．Problems encountered: major quality defects – visual damages and scratches
- Visual damages and scratches were found on the product surface after shipment when the end consumers had received the products.
- Received negative reviews online from end customers.
- Faced brand image damage and deterioration.
- Suffered from significant financial damage due to returns, such as operational costs, shipping costs, and maybe fines, as well as from the sale decrease.
3．Origin of the problems: lacking procurement and contract management
Quality damage can be very wide in different industries. The most common ones are functionality (wrong parts/components/materials applied) and visual (wrong colors/shape/form/damage/scratches on the surface). It’s vital to know the origin of these problems and define all types of quality issues in the contract to avoid needless negotiation.
（1）The manufacturer’s improper production and QC management:
Most of the time, problems are caused by improper (human) management in the factory. In this case, apparent management mistakes were seen in this manufacturer.
The wrong approach towards production presented by the top management misled their workers – not be careful with handling the products in multiple stages of the production process.
（2）The client had no detailed terms written about QC standards and compensation:
On the other hand, the client had room to improve their purchasing management in China:
- No production agreement was signed.
- Quality standards about visual quality issues (damages and scratches) were not well written and specified in the agreement.
- Supported pictures relating to defining acceptable and not acceptable visual damages were not attached in the agreement.
- No agreement was written about the compensation for (visual) quality issues: there was no agreement on what/who/how much/how/when will compensate. In other words, there was not clearly agreed on what a failure is, who will be responsible for, how much compensation will be, how this will be compensated, and when this will be compensated.
4．A practical solution to a successful purchasing: by IAAD China Working Method
We can find practical solutions by implementing several practices according to the IAAD China Working Method.
Solutions vary in different situations and issues. You may take this case as a reference to apply the key of the solution to the same or similar cases with a customised strategy, when necessary, to prevent repeated issues.
In this case, one of the key elements to successful purchasing was missed: the written agreement with details about the (visual) quality standard and compensation for quality issues if they arise. Here’s what you could do:
First of all, it is, in any case, favourable to correct quality defects before the goods being shipped out:
Focus on prevention: You should make sure that you always implement a proper agreement and execute quality inspections before shipment.
If you can prevent quality failures before shipping, you can avoid or reduce the possibility of any negotiation for compensation for quality issues or other damages.
(1) Interest – IAAD China Working Method
It is always essential to ensure that the factory has enough financial incentives to really be “willing” to comply with your demands.
If factory workers need to increase their standards, this will require a lot of efforts from the management to do so. Usually, factories are willing to cooperate if they also can grow together or earn significantly from it.
Secondly, a Chinese manufacturer will never just send you financial compensation by a transaction. It will only cooperate with compensation for quality issues when there is a financial interest to do so.
You can think about future orders you might place at their factory, or maybe your cooperation value higher than average. You can use that as an interest in your negotiation about compensations that will follow.
Meanwhile, a legal interest is vital.
You could create legal interests to make the factory deliver according to your standards by implementing a detailed agreement compliant with Chinese law. The factory will understand in detail what they are signing for when reading the contract.
Although you seldom go to court in China, holding a detailed production contract gives the factory pressure to take it more seriously and enhances your negotiation and legitimate power if any issues occur.
(2) Agreement – IAAD China Working Method
Now, you can focus on the details that cover all possible specifications:
- Define in detail what damages are accepted and not. In this way, you can avoid any different opinions about the definition of a damage. For example, what kind of visual damage or scratch you would accept and refuse.
- Define visual quality issues (damages and scratches) in details by pictures or other visual materials to further making your description visible.
Make it also a visual reference for the execution of a visual inspection.
The more you describe in detail, such as what is accepted and refused, the higher chance you can avoid negotiations afterwards about this subject.
Not only with visual standards, but also defining and describing technical, performance or design standards that will clarify the responsibilities and avoid negotiations and subjective discussions.
- Define responsibilities and compensations in detail to avoid negotiations afterwards:
Define clearly what/who/how much/how/when will compensate.
That means a clear mutual acknowledged definition of what a failure is, who is responsible for this failure, how much compensation relates to a certain failure, how this will be compensated, and when this will be compensated.
Having these terms in your agreement, the manufacturer commits legally to a mutual acknowledged responsibility, the execution of taking responsibility and the moment of action.
Although not every manufacturer would agree with the COMPENSATION TERMS proposed above, the practice will strategically help you receive the most amount of compensation to cover the quality damages as much as possible.
It works even in a situation in which the manufacturer would break its legal commitments, and your negotiation position will become significantly stronger to negotiate the most possible compensation for quality issues from the factory.
(3) Assessment – IAAD China Working Method
In this case, one of the most critical steps you should do: make sure all products are well inspected before packing and shipped out of the factory, including executing visual inspections.
The golden rule is to implement QC inspections as much as possible to lower the possibility of any damages, one by one, from functionalities to visual completion before shipping out and ending up end customers worldwide.
As mentioned in our previous USE CASE-How to ensure Chinese manufacturers use correct components, after payment and shipment, you will somehow lose your negotiation power to request a solution that really beneficial to you.
More importantly, even though your factory is willing to compensate for the financial losses, they can’t pay for the brand image damage and deterioration from the negative (online or offline) ratings given by your end consumers.
QC inspection implementation is even more vital to your management.
QC inspections will have to be supported by clear terms that describe failures so as to avoid discussions about your inspections’ results.
The judgement of the quality inspector is based on the agreement you made with the manufacturer. It can help you avoid negotiation during inspections before shipment, which leads to compensations or solutions agreed with manufacturers before any damages hit your brand or company.
Conclusion:
Although there’s no 100% guarantee that your factory will do exactly as the contract says, you now should be able to make a detailed contract to protect yourself as much as possible from suffering a never-ending negotiation. And you hold the legitimate power to request compensation for quality issues as long as you have the contract signed, reducing the chances of losses at some points.
The goal is to get as much compensation as possible, but not whether the manufacturer would (morally) deliver according to what is agreed upon.
The higher amount of compensation and standards you agree with the manufacturer, the more you will receive.
A few key takeaways for the solutions:
- Make a detailed contract and sign with your manufacturer before down payment and production.
- Define all types of (visual) quality damages in details with written terms and conditions as well as pictures or any other visual materials.
- Create financial interests for the manufacturer by stating the details in black and white.
- Make details about responsibilities and compensation for quality issues to avoid negotiation: what/who/how much/how/when will compensate.
- Before packing and shipping, implement QC inspections as much as possible to lower the possibility of any damages, one by one, from functionalities to visual completion being delivered to your customers worldwide.
To learn more about China’s supply chain environment, contact us or read the book IAAD China Working Method.