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Naughty tactics some suppliers use to maximize profits

Stephen Ashcroft, from the procurement and supply chain consultancy Brian Farrington, has written an interesting post listing naughty tactics some Western suppliers are using to maximize their profits: “The naughty vendor checklist”.

A supplier’s contract delivery team is not only measured on its ability to ensure customer satisfaction, but also on the profitability of the contract as a whole. While it would be unjust to suggest all vendors will seek to abuse the relationship to maximise profit, the [buyer’s] contract manager must be alert to this possibility. The key to ensuring this does not happen is control, through effective contract management.

CNY cashStephen compiles a long list of supplier tactics he has witnessed.

While I was reading his post, I could not help but think that many Chinese suppliers have studied the list in all details a long time ago!

So I decided to put side by side Stephen’s list and a list of the tricks that I know many (questionable) Chinese suppliers will attempt if the purchaser lets them get away with it.

Western Naughty Supplier

Chinese Poor Supplier

Strict interpretation of contract terms, and a refusal to implement minor changes.

Overlook quotes, purchase order terms and contracts to modify product so that it reduces costs to vendor

Strict adherence to the specification, including task programmes.

Very flexible adherence to the specification to optimize savings to vendor

Charging for minor changes and variations without cost visibility.

Same.  Claim that requirement was not included in the initial price, even if the RFQ listed it.

Extra transport charges and travel costs.

Claim that the forwarder used by purchaser is too expensive for local transportation and ask for more money or switch to supplier controlled forwarder

Delay in reporting problems, preventing timely problem solving.

Omit to mention problems or risks until there are so obvious that it is not possible to hide them.  Some poor suppliers will even still claim there is “no problem” in the face of evidence, hoping that the purchaser will proceed with the next payment.

Frequent small reductions in service delivery, eroding the specification.

Famous China quality fade:  Supplier makes successive attempts cut the cost and explore how far it can get away with.

Concentrate on manipulating high-cost aspects of contract to manipulate the price.

Similar tactics with raw material prices.  “Steel prices have increased by 15% over the last 3 months.  I need to increase my price by 15%.”  Forgetting price = material cost + labor + overhead + margin!

Shift responsibility to sub-contractors to avoid accountability.

Chinese supplier will rather shift responsibility to the purchaser!  “Oh, we the specification was not clear.”  Or “You did not make it clear in your last p.o.”

Blame pressure put on price by the buyer at the time of contract for performance shortfalls, and then try to renegotiate the price.

Very common for low-end products.  Supplier will take any opportunity to add a few cents here and there.  It is also true that their margins for such products are really thin.

Deliver low quality goods when buyer is known to be short of stock and desperate for supply.

Make substandard products available for inspection by purchaser, 2 days before the ship leaves harbor.  When inspector rejects the goods, it puts the purchaser in the conundrum: get no products or get bad products.

Escalate minor difficulties to prevent them being raised in the future.

Most Chinese supplier will not escalate any bad news.  Sometimes not even good news.  “No news does not mean good news.”

Push for advance payment to assist cash flow.

Push for 100% payment in advance for small orders.  Requires 30 to 40% advance payment and balance prior to shipment (after inspection).
To be fair, bad payers in these international contracts are difficult to sue.  As a consequence, unless a L/C is opened, it is hard to get long payment terms.  Only possible after a long term business relation is established.

Charge interest on overdue accounts.

Not common.  Supplier will not ship prior to payment, so there are no real overdue accounts.  This is only for export business.

Suspend work/deliveries if accounts are overdue and then charge for re-mobilisation.

See previous.  Supplier will not ship prior to payment, so there are no real overdue accounts.  This is only for export business.

Exaggerate costs of variations and changes to enhance profit.

Exaggerate increase of labor cost  and raw material to enhance profit (or protect margin)

Seek relief from service level agreement targets.

Seek relief from previously confirmed tolerances and production performance targets when it proves hard to comply

Seek relief from improvement targets.

In the case of poor China suppliersm the real challenge is to keep the existing targets

Substitute skilled staff for semi-skilled workers.

Substitute specified material for cheaper but substandard material.

Promote sustainability to seek premium costs.

Never heard this one yet in China.

Establish a precedent, which then becomes the new standard practice.

Famous China quality fade:  Supplier makes successive attempts to cut cost and explore how far it can get away with.
Will also try to charge for some small thinks such as special packaging, pallets . . .

The situations related to payment terms at the “Chinese Poor Supplier” side relate to export business only. Payment terms for China domestic business are very different.  I also skipped some of the original list when I could not find a related “Chinese trick”.

The main point here is that, in China or in the West, purchasers really need to actively manage their suppliers to avoid the worst of these tactics.

And in conclusion, it is important to note that beside these typical “poor Chinese suppliers”, many good suppliers operate and serve their clients well in China. Some of them are striving to improve and secure margin by moving up the chain and by increasing efficiency.  Like always, China displays the best and the worse next to each other.

If you have other “naughty” situations you want to share, do not hesitate to connect through Twitter, Google+ or LinkedIn.