Portfolio

Chinese supplier agreements and purchase orders – How important are they?

April 16, 2010 Articles 0 Comment

The process of importing from China can be a very complex one. Once you have found the right supplier, conducted the relevant due diligence and received samples that you are happy with, you still need to make sure that when  you place your order you get what you originally wanted. Hence having a supplier agreement in place or purchase order for your chosen supplier can minimise many of the risks involved.

Supplier agreements and purchase orders can help you minimise many of the risks associated with importing from your chosen supplier. They outline and reiterate the original trading and payment terms, price, quality, MOQ’s etc. By having this in place you are able to hold the supplier accountable to these along the process and have them make any necessary changes should any issues arise. However, this may not always be the case.

Having an agreement in place or even a purchase order is all well and good but unless they are drafted under Chinese law they may not be adhered to. Even if they are drafted properly they may still not be adhered to and having a supplier agreement or purchase order template drafted under Chinese law can be a very expensive process. There have been many cases where these have been drafted under Chinese law and when any disputes arose, the supplier was not held accountable to their foreign customer under the Chinese Law system anyway.

This is where is it very important to have an excellent relationship with your supplier so that the terms stipulated in your purchase order that you negotiated with them in the beginning such as price, quality etc. are adhered to. Using a professional sourcing company with a team on the ground in China will help immensely in this area. They understand the culture and what it takes to build a long-term great relationship with the supplier. They can speak the language and as such are able to make sure that your agreed payment and trading terms are adhered to and your products are actually made to your specifications in the purchase order.

The major terms of a supplier agreement, most of which can also be set-out in your purchase order include:

Products and their specifications

The actual products that need to be made must be specifically set-out in any agreement or purchase order. Detailed specifications of the products also need to be described in the purchase order to ensure that the supplier has the best chance of understanding exactly what you want. Ideally the purchase order should be accompanied by detailed photos or an actual sample of the product to ensure there are no issues.

Forecasts and Binding Purchase/Supply Commitments

Often within supplier agreements each party will designate a certain minimum commitment to each other to produce and purchase a minimum amount of product over a certain time period. In many circumstances, depending on the particular case, the buyer will also provide a forecast of future orders to the supplier so that the supplier can plan and allocate adequate resources.

Price of the product

Determining a firm price of the product in the purchase order that was negotiated in the beginning, is very important so that there are no surprises during the process. In some cases suppliers may try to increase the price during the process and say it is as a result of things like currency fluctuations, increase in cost of raw materials or claim that you’ve made changes to the original quote specifications etc. Having prices stipulated in the purchase order can stop this from occurring. Supplier agreements may include periodic future price rises that may have been previously agreed upon.

Quality control

Both the buyer and supplier need to have previously agreed on certain terms required to conduct quality control during the process and this should be outlined in any agreement or purchase order. Typical terms may include:

-          Access to production sites at any time

-          Random quality testing prior to shipment of the goods

-          Buyer may have a representative present during anytime during the process or the entire process should they wish

Term

The term of any such supplier agreement is to be determined by both the buyer and supplier. The term of the agreement will usually be as long as both the supplier and the buyer have made a return on any investment.

Arguably more or at least equally important as negotiating and concluding a strong agreement or purchase order, is for the buyer to constantly monitor that the terms of the agreement are being adhered to and taking any relevant actual should they not be.

As mentioned above long-term relationships with Chinese suppliers are desirable and buyers should really take the time to find and work with a reliable supplier. However buyers should consider having potential alternative suppliers should any of the terms in the supplier agreement or purchase order not be followed and the issues cannot be resolved. Because at the end of the day all you want is for your importing process to be as smooth and as easy to manage as possible.

Written by Matt Edwards

Related posts:

  1. How do I Import From China? – Know the China Sourcing process and timeline
  2. Chinese New Year – What is it and how does it affect you?
  3. International Trade Terms – What don’t you know about importing from China?
  4. The China Sourcing Sampling Process
  5. The importance of Due Diligence – Sourcing or Importing from China

Leave a Comment

Little About Us

ABOUT SILK ROAD. We Simplify Importing About Us Our team has years of experience in China trade, exactly what your project needs. Don’t get caught out dealing with unqualified suppliers, paying more than you need to, stressing ... Read More »