By David Lindley
President, EXIM LLC

When we think about negotiating, price is always the topic that comes up first. We ask basic questions like: What does it really cost? Why does it cost so much, and how can we make the same item for less? In our quest for great prices in China, it is sometimes easy to forget that we should be negotiating for a successful overall transaction and not just a good price.

Here are a few questions to ask that will help make your transaction a long-term success:

Warranty: How long is the warranty period and how will warranty claims be settled? If the item is low in volume, or difficult to ship, how will satisfactory proof of defect be offered to the factory? How will compensation be offered by the factory? Will it be cash or product replacement? Is there a reserve in initial payment for potential warranties? Dealing with warranties is certainly easier when the relationship is ongoing rather than in a single transaction relationship where the product has not been manufactured for some time. Typically, factories are more willing to part with replacement products rather than with cash, especially if there is ongoing production to draw replacement stock from. If you think you are only going to do a one-time transaction, it is better to factor that in to the cost upfront for everyone rather than planning to be able collect compensation from the factory two years from now.

Inspection: When will the goods be considered in “good delivery” to the customer, and who signs off that they have been received in good order? Is that at shipment from the factory, or does it happen when the goods land at the customer’s door halfway around the world? If the goods are defective, what remedies are in place? If payment has already been made by LC or wire, how will the customer be reimbursed? How is the defect shown to the factory? What is the time frame to report a defect and to have compensation for the defect?

Late Delivery: What happens if the shipment is late? Is there a penalty by day or week or hours late? Are there rush air shipping provisions? If multiple factories are involved in the product, what is the chain of responsibility for timely delivery?

Quality Control Process: How will quality be managed? What are the forms, reports, schedules, inspections and certifications that will be required? Both the buyer and the factory need a clear understanding of their responsibilities, especially when a third party is supplying raw materials or goods in process for final assembly that neither the factory nor the buyer may fully control. In more technical fields, the production process document may be much longer and more important that the general commercial contract. Sadly, production process documentation is often overlooked in a transaction, yet it is the single most important aspect of creating successful production run and shortening the learning curve of both the buyer and the seller’s work together.

Moving Input Cost: How are factors like currency valuation and raw material cost handled? If the RMB drops to 7.7 to the U.S. Dollar, or a raw materials becomes 40% more expensive (like steel did in 2005), how will the issues be worked out? Often you will see these issues handled by both sides agreeing that if the input cost remains up/down by a certain percentage, then the price will not change. If the cost goes outside the agreed upon band, then the price will be raised or lowered accordingly. The key here is that by agreeing to this up front, you are in a better position to handle future fluctuations that may be difficult to predict. It also gives an approaching warning sign for both sides to watch for if the input costs are close to being triggered.

A good transaction is when the goods are delivered on time, in good condition and at the agreed price. Don’t forget to negotiate on all aspects of the transaction. Price is always important, yes. Just be sure to consider everything else involved in production and delivery.