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Treat Your China Suppliers Well....

By Dan Harris and Steve Dickinson

Yet another excellent post by Santiago Cueto at the International Business Law Advisor. It is entitled, "How to Avoid International Disputes: First, Be Good to Your Suppliers," and it provides absolutely critical for how to treat your suppliers. I virtually never go a week without talking with a client retaining my law firm to write their OEM supply contract with a Chinese supplier and that means I virtually never go a week without saying that if "we do end up in a lawsuit on this, we are guaranteed to lose out no matter what." My mantra is as follows: "The main purpose of this agreement is to prevent problems. It will help prevent problems by giving both parties a road map of where things are supposed to go and a road map of what each of you are supposed to do. It will also prevent problems by setting out a clear path for handling any dispute that arises. This tells everyone that the party that causes the problem can be fairly easily hauled into arbitration or court and there will be a price to pay for having caused the problem. But really, the whole purpose of that too is to prevent problems because, let's face it, if you do end up having to litigate against your supplier, that means things have gone really wrong and no matter how good a contract you have, litigation is never going to make you whole." Or as Cueto told one of his clients who wrongly thought "fantastic" margins can cure all evils:

Be careful," I advised the client, "litigation can easily erase those 'fantastic' margins. Worse yet, your back- up suppliers may get wind of the dispute and cut you off. Now you're left scrambling for a new supplier while your customers are screaming for their orders." Good luck with that.

Cueto then talks about how companies so often "get the supplier issue backwards" by thinking that because they are the one ordering the product, they are in the dominant position and then sets out four ways to become a valued customer of your suppliers:

Always pay on time. For the sake of emphasis, I'll repeat this one: Pay your bills on time! You can negotiate for favorable payment terms before you place an order, but once the order is placed, don't renege or attempt to change the rules. If you can't, call up your suppliers and tell them why and when you will pay. Don't play games with suppliers' cash. You'll be absolutely amazed at the goodwill and benefits you will earn by observing this simple rule. Provide adequate lead times. Try to give suppliers as much lead time as possible on your orders. Unless there's a compelling, competitive reason not to, share with them an honest projection of your needs and keep them abreast of any significant changes in that estimation. When developing your lead times, it helps to be knowledgeable about your suppliers' production methods and needs. Personalize the relationship. Visit suppliers' offices. While you're at it, include them in some of your strategy meetings. Invite them to break bread and invite them to your office parties and picnics. Share information. Keep the good suppliers aware of what's going on in your company. Tell them about changes in key personnel, new products, special promotions and so on. Many times, you'll find that good suppliers can be help you find new customers.

Though Cueto was writing about how to deal with suppliers everywhere, his advice holds true of China as well. Though China definitely has its fair share of terrible suppliers, I can tell you that many of my clients have had terrific long term (decade or more) relationships with their Chinese suppliers. I can also tell you that, without exception, they have manged to achieve this by pretty much sticking to the advice above.

Full post as published by China Law Blog on May 17, 2010 (boomark / email).