China sourcing: The nightmare scenario

Processing a claim against a factory – Part II

In last week’s blog, Processing a Claim Against a Factory – Part I, we talked about the main causes of a claim. It is important to understand that all claims are different when it comes to China sourcing, and there is no one-size fits all solution for these. However, this week, we’re diving into how to process and handle a claim against a factory. These are general rules of thumb that can be applied to most claims. 

How to handle a claim

Communication, as usual, is key:

1. Establish clearly the nature of the claim. Document it with photos and/or measurements and, if the claim is extensive, get a third-party professional to do it.
2. Immediately contact the factory, inform them of the nature and extent of the claim and provide them with the evidence if you have it.
3. Develop an internal strategy for negotiating with the factory, which includes preparing all the grounds for compensation and optional solutions, based on the contract, the relations with the factory, the size of the claim etc. before contacting the factory.
4. Negotiate without delay so as not to interrupt ongoing shipments with the same supplier.

Possible outcomes of claims

Because every situation is different, it’s difficult to identify specific solutions and outcomes.  But generally, the following is true:

• The better your documents (i.e. Purchase order contract, claim documents), the better the outcome.
• Trust is key for a good negotiated outcome.
• Recourse is often limited: You are unlikely to get a check for the defective merchandise. Unless there are special circumstances, the most likely outcome is a credit against future shipments.
• The negotiation process is usually tedious and lengthy.

Lose-lose.

You have heard of win-win scenarios where all parties benefit.  Shipments of bad quality goods are the opposite, they are lose-lose. Everybody loses: especially the importer and the factory.  Money is lost, confidence and trust is eroded and a lot of waste occurs.

And yet it can all be prevented.

CPG advice

Avoid the nightmare scenario of a bad shipment by taking the following steps:

1. Pre-qualify the factory: Quality Assurance starts BEFORE the order is placed. Make sure the factory knows the product and has a good quality control team.
2. Embed quality in your processes. Have a clear PSS (Product Specification Sheet) and ISS (Inspection Specification Sheet) and make those documents part of your contract with the factory.
3. Give yourself time: If a factory is new, or a product is new, place the order early and give yourself more time.
4. Do not pay until quality is confirmed. Many factories require a 30% down payment, this should not be made until you have assurance the factory can make the product.
5. Do a pre-shipment inspection on ALL shipments.

Have you had to process a claim against a factory before in your China sourcing career? If so, what was the outcome? Share your thoughts and experiences with us in the comments below.

 

By Ruby Liu
Ruby Liu graduated from Hengshui College and been working for China Performance Group for 3 years. She has rich experience in developing, assisting and managing vendors in conjunction with our QC department.