MAKE: The Ten Rules for Contract Manufacturing in China

There are three overarching “must haves” for producing/buying in China: a good supplier, a good contract and good IP protection. If you pay attention to the tiniest of details on all three you will likely have a profitable experience. Even small lapses in any of the three could spell disaster.

Here are ten simple rules to follow:

Before You Begin your Supplier Search

1. Create a detailed matrix of information internally that paints a clear picture of  the type of supplier(s) you want/need to work with. Factors should include the  number of factories you may need (components, final assembly, specialist suppliers for different products), quantities to be ordered, technological sophistication  needed, pricing, geography and other factors.
2. Register all of your trademarks, copyrights and patents in China. China is first to file,    not first to use. If you are not diligent with this, you will at some point lose your IP.
3. Craft a comprehensive non-disclosure agreement and when you use it be sure to get the factory’s official “Chop” (company signature) on it; otherwise it is virtually worthless.
   
   The Search
    
4. When starting the supplier search always start with the “six Ds” - Due Diligence, Due  Diligence and Due Diligence. Start with a long list of 50 potential suppliers, and then    conduct background checks and audits on the 10-15 best prospects. Ensure they are who they say they are, can do what they say they can do, have a track record of success, and have experience in producing your type of products and utilizing your needed production processes and tools.
5. When you have narrowed potential suppliers to 4-5 contenders, visit them personally     (or have a good sourcing/manufacturing consultancy do it for you) to conduct     inspections, see samples, get basic pricing, interview management and cross check what you have learned about them previously to what you see on site.

   Cementing a Relationship

6. Once a vendor is chosen, draft a comprehensive OEM agreement/contract. A purchase order is NOT a contract. Ensure the agreement includes clarity on payment terms, penalties for non-compliance. China as a venue for conflict resolution, quality control regimes and standards and every other possible positive or negative contingency. We suggest having an experienced international business   law firm draft and approve the contract with you.
7. Draft comprehensive purchase orders that explain in minute detail every aspect of the order at hand from raw materials, production and delivery times, logistics, quantities, defect allowances, quality standards, production details and final product expectations.
8. Micromanage the production process. Keep people on the ground during production. Conduct quality control spot checks, keep a dialogue open with factory personnel.
9. As the relationship grows help the factory improve its operations and practices. This will be appreciated and will lead to long-term, mutually beneficial relationships.
10. Constantly monitor quality, teach quality and demand quality.

See Also: Global Supply Chain Logistics Management