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Managing the Production Process in China – Part I: Sales Contract, Deposit
Payment & Batch Samples

Posted on July 27,
2015

by ChinaImportal

in Strategy & Processes

Click Here to Learn More About
Importing
Products From China

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

Shipping

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).

Note: The process above assumes that you pay according to Telegraphic Transfer (T/T) terms. If you pay by Letter of
Credit (L/C), the payment process is different. Click here to read more.

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.

Planning to Import Products From China?

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Find the Right Manufacturer

Define Quality & Product Specifications

Get Custom Designed Product
Samples

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Production & Quality Control

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Tags: general

About ChinaImportal
The ChinaImportal Knowledge
Base is an extensive library of practical guides and articles on various
topics related to product development, compliance and manufacturing in Asia.
Since our launch in 2013, we've been featured on Bloomberg, Quartz
Magazine, LUX Magazine, Global Sources and China Chief Executive.

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Managing the Production Process in China – Part II: Quality
Assurance, Balance Payment & Shipment →

One Response to “Managing the Production Process in China – Part I: Sales
Contract, Deposit Payment & Batch Samples”

Renaud
August 9, 2015 at 3:10 am
#

Pretty good overview! Three more things come to my mind:
1. Do not ever
wire money to a personal bank account. Always a company bank account.
2.
The suppliers calls the initial 30% payment a “deposit”, but in China deposits
are NOT sent back to overseas customers in 99% of cases.
3. If quality is
important to you, do not push too hard on production timelines. Add a few
weeks to your schedule as a “safety cushion”.

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