ODMasia are currently dealing with a promotional products factory in China for one of our Quality Control clients. Our client is having trouble with the supplier he chose and placed an order with.   The factory keeps telling him that production start date has been delayed every week for the past month.

Growing impatient, our client asked ODM to intervene and negotiate a start date and new contract with penalty payments on his behalf.  ODM sent a Merchandiser and a Manager to negotiate with the factory owner.

After three strenuous hours, contract signed!

We went to meet the Owner of the factory and explain our clients position.  The factory was very defensive and kept on discussing his position that he was too busy with other complex orders and how complex our clients product was.

Making the factory understand the position of our client, now expecting to receive his products a month late, drew little empathy.  Factory owners were happy to take all the orders they could from new clients, then sit on the deposit payments for a while before finding free production capacity to start production.  This is not an ethical or fair way to start or run a business but is very common practice in some factories in China.

Special Attention for orders running up to Chinese New Year in 2012 !!

Whilst we would often suggest switching factories at this stage, our clients hands were tied.   They had already opened a mould with this factory so changing factory was proving difficult also and could prove a loose:loose situation.

Factory kept on interrupting us while we were negotiating. After a good hour of fighting our position the owner of the factory simply refused to continue speaking in English when talking to the ODM manager (roll playing the part of the customer in the negotiations) not speaking Chinese.

The ODM merchandiser needed to translate the discussion entirely making it even more complicated for both parties involved.   Negotiating in a foreign language is always more difficult for the factory so we kept switching conversation back to English.

Entrance of Factory

After many threats to cancel the order ODM representatives managed to get factory to commit to new production dates.  Whilst this was a start we refused to accept this new promise without further assurances.

ODM had the factory sign a contract defining penalty terms if production would not begin on given dates.  It took more then three hours hard negotiations for him to agree to all our terms of when to start production.

The process took so long because the factory owner kept going back on his decision, changing his mind, or adding specifications to the product being manufactured that our client could not accept.

Why not sign Penalty Clauses in the first place?

Most factories are very reluctant to sign a contract with penalty terms unless they are fully confident that they can respect the terms outlined.  Many Chinese factories are operating at full production capacity and are faced with difficult unforeseen circumstances that delay production

  • Labour shortages
  • Electrical power outages
  • Machinery Problems
  • Supply chain / sub contracting problems
  • Murphys Law

When you sign a contract with a Chinese factory or any other factory in the world stipulate when you need your products to begin and end production and get the factory to agree to terms.  This is especially the case with new product development and working with new factories.   In general clients need to be prepared for delays and build them into their schedules.

If you are working with a new factory then ODM do suggest negotiating penalties, but this may cost you extra.  In this case you are more paying a bonus for finishing production early.

For our new contract we gave the factory a time frame for beginning the order. If they did not begin the production in the specified time they will need to pay the penalty fine, increasing as the delays got longer.   Reimbursing the order and paying additional fines were triggered after a certain date in the contract.

Other Suggestions

It is important to send your staff or those of a trusted party to the factory early.

  • Conduct an IPC control.
  • Make sure that you get the factory to submit their Production Schedule at the same time that you place the order.
  • Use a Buying Office to Control Production
  • Get Recommendations on which factories can be trusted from industry peers.

Below we see the full warehouse of the supplier we controlled for our client.   No spare Production Capacity was available and we were not the only company pressuring to get our clients order in production ASAP.

Warehouse of Factory

Check out our other blogs about contractsincoterms & General Trading…