There are multiple factors behind late deliveries from China. Delays can be frustrating, but understanding the causes will help your company develop the necessary strategies to overcome the challenges and minimize potential problems.
Poor communication and badly written contracts are two important factors that affect deliveries from Chinses factories. Clearly defining delivery terms and setting penalties for late shipments beforehand can help ensure timely receipt of orders from China.
Potential causes for delivery delays
Stability in the maritime market is crucial when most goods are being shipped by sea. Other unpredictable situations such as weather conditions, increased fuel costs, or the COVID-19 pandemic can lead to delays in deliveries.
The complex logistical processes involved in shipping from China can often result in delays. These disruptions can be due to inventory mismanagement, customs issues, or delays in land transportation.
Customs restrictions, especially those related to security checks and international regulations, can also slow down deliveries. Customs inspections can take time, especially when goods are not properly declared or if documents are incomplete.
In China, important holidays, such as the Chinese New Year, can be problematic for timely deliveries. During these times, factories may shut down for several days or even weeks. Companies must prepare early and plan around local holidays.
Contracts and Agreements
But one of the most important things to consider is the execution of a well written manufacturing agreement. Establishing clear delivery terms in manufacturing agreements is crucial for timely deliveries. Specifying delivery dates and including liquidated damages provisions helps ensure adherence to delivery schedules.
A China Manufacturing Agreement should always include a delivery date with a liquidated damages provision tied to late delivery. A clause in the agreement could read that delivery should be within 30 days, and for every additional day, the Chinese manufacturer will pay the buyer 1% of the purchase order price within ten days.
Chinese manufacturers become more realistic about their delivery times, when there is a set penalty for late deliveries. It is better to know before ordering the real delivery date, even if it’s longer than anticipated, than having a late delivery after placing an order.
Liquidated damages are pre-agreed damages that are to be paid if contract terms, like delivery dates, are breached, to compensate for potential losses without having to go through a legal process. Liquidated damages provisions act as deterrents to breaches and help in quicker resolution of disputes. Chinese courts look favorably on such provisions, and they will enforce them if written appropriately.
Liquidated damages are sometimes referred to as contract damages or stipulated damages.
A typical contract establishes an amount of money that must be paid by the Chinese factory if it breaches the agreement with late delivery, as liquidated damages.
Figuring out the right dollar amount for liquidated damages is not that simple. Legal advisors for both parties should negotiate the number based on extensive market experience. The chosen amount should accurately represent the stakes involved.
To prevent late deliveries, including liquidated damages in contracts with Chinese companies is crucial. They convey both the importance of the delivery date and the potential consequences for failing to comply with that date.
To arrive at a number, it is important to consider overall amount at stake, the potential damages from a breach, the prestige of the Chinese company, and even the location of the court. The objective is to come to an amount that’s high enough to deter a breach, yet reasonable enough to ensure the contract is signed and enforceable in China.
Chinese courts should not feel that such provisions are punitive rather than compensatory. There is a fine line between liquidated damages and penalties. An excessively high figure might lead a Chinese court to dismiss it, viewing it as punitive measure rather than a compensatory one.
Foreign companies, in their quest to shield themselves from potential losses, set the bar way too high, unwittingly making enforcement a challenge.
Some Chinese companies prefer to sign contracts with high penalty clauses, knowing that they may be deemed unenforceable by the Chinese courts.
Well-structured liquidated damages can ensure product delivery expectations and provide a strong basis for prejudgment attachment of assets if they are not met. Prejudgment attachment allows for seizing or freezing the other party’s assets before the court decides on the case, making it a powerful means of exerting leverage against the Chinese factory.
Chinese companies do not want their assets seized or frozen and will respect the contract’s terms if the agreement includes liquidated damages provisions.
It is important to clarify the start day for a 30-day delivery schedule. Foreign companies typically go with 30 days from the issuance of the purchase order, but the Chinese factory often pushes for it to be 30 days from its receipt of payment or 30 days from its receiving proof of payment.
Clarifying the starting point for delivery timelines is essential to avoid misunderstandings and to ensure that both parties have the same expectations regarding delivery schedules.
When it comes to contracts, small details are big. In China, the specifics can make or break a deal or even a business. Liquidated damages can be a good thing, but only if done right. When well-structured, liquidated damages are a powerful tool for ensuring delivery expectations are met, but the details within these provisions can significantly impact success.
A well written contract (in Chinese) should specify in detail the delivery expectations and the penalties that will accrue if the Chinese manufacturer fails to meet them.
There are additional steps that can be taken to minimize late deliveries, such as optimizing inventory management, which entails better inventory planning, anticipating future needs, and actively managing stock to avoid production delays.
Working with reliable logistics partners can also help mitigate delivery delays. These partners should have a good understanding of the local market, the ability to effectively handle logistical issues, and a strong track record in goods transportation.
Supplier Diversification is another good strategy. By diversifying your suppliers, you can reduce dependence on a single source and minimize risks. Diversification can also offer more flexibility, allowing you to switch to different suppliers based on their ability to deliver on time.
Understanding and complying with customs regulations can help avoid unnecessary delays. All goods should be properly declared, and all necessary documents should be complete and accurate. This includes paying appropriate customs duties, and adhering to all import and export requirements.
Planning and preparation are critical when dealing with delivery delays from China. Companies should set realistic deadlines for orders and take delays into consideration.
Regular communication with Chinese suppliers on the status of orders can help you identify potential issues as soon as they arise. Having a back up plan is a good strategy to deal with unforeseen delays.
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DISCLAIMER: All information in this article is verified to the best of our ability and is assumed to be correct at time of release; however, Woodburn Accountants & Advisors does not accept responsibility for any losses arising from reliance on the information provided within. The information provided is for general guidance and does not replace specialized advice.