Supplier Risk
The moment to prepare a clean exit is the month when nothing is wrong.
Contents
Supplier relationships rarely end in a single event. They end through a sequence that buyers notice late, because each step is individually explainable.
The first is a change in the person you deal with. A salesperson who has handled your account for a year is replaced, and the replacement does not have the file. That happens for ordinary reasons and it also happens when an account has been deprioritised.
The second is a slower answer on technical questions. A supplier who used to reply in a day now replies in a week, and the answer is shorter. This is usually a sign that the engineering attention has moved to another customer.
The third is a price change with no explanation, or an explanation that does not match the market. A sudden increase on a repeat order is sometimes a genuine material move and sometimes a supplier deciding the account is not worth keeping at the old price.
The fourth, and the one that matters, is a quality failure on a routine order. One failure is an event. Two on the same characteristic is a process that has stopped being controlled, and it is the clearest signal that the relationship has entered its last phase.
If the relationship ended today, five things would be at risk, and naming them is the whole of an exit plan. Do the count on a normal day, not during a crisis, when judgement is worst.
Open orders. How much is in production, how much has been paid, and what the cancellation terms are. A purchase order usually states a point after which cancellation is charged in full.
Deposits. Money already sent against goods not yet received. This is the hardest exposure to recover and the easiest to avoid on the next relationship by keeping the deposit tied to evidence.
Tooling. Moulds, dies, jigs, printing plates and any fixture bought for your product. Who physically holds them, and who can prove ownership.
Files. Specification, bill of materials, artwork, packaging drawings, test reports, approvals and the approved sample. These are the assets that make a transfer possible at all.
Stock. Finished goods the supplier is holding, and any material bought specifically for your order. Both are negotiable and both become leverage in a dispute.
Write the five lines down with a number and a location against each. A buyer who can do that on demand is a buyer who can leave in a month rather than a year.
Tooling is the asset that turns a supplier change into a project. A mould can cost more than a container of product, and its ownership is decided by a document rather than by who paid for it most recently.
The question to answer at the time of purchase is whose name is on the tool. Three arrangements are common. The buyer pays separately and owns the tool, which should be recorded in a tooling agreement. The buyer pays and the cost is amortised into the unit price, in which case ownership should still be stated, because amortisation is a payment method rather than a title. The supplier pays, in which case the supplier owns it and your transfer will require a new tool.
A tooling agreement needs five lines: what the tool is, what it cost, who owns it, where it is held, and the buyer's right to remove it on request. Add the condition of the tool at handover, because a mould that has run a million shots is not the asset it was, and the second supplier will need to know what they are receiving.
Where the tool sits inside the supplier's plant, removal is a physical event that requires cooperation. That is why the agreement should be signed when the relationship is good. A clause negotiated during a dispute is a clause you will not get.
The instinct is to switch. The safer move is to overlap, keeping the old supplier running while the new one proves itself on the same product.
An overlap costs money, because two suppliers are being qualified at once and the first order from a new plant is always the most expensive. It buys three things: continuity of supply if the new plant fails, a comparison between two production runs of the same specification, and negotiating position, since a supplier who knows a second source exists prices differently.
Sequence it deliberately. Place a small order with the new supplier while the old one is still producing. Compare the two against the same approved sample and the same inspection criteria. Only when the new run passes twice should the old supplier's volume be reduced.
Two quarters is a realistic overlap on a proven product with existing tooling. It is longer where the product needs new tooling, regulatory testing or a packaging change, because each of those adds a validation step that cannot be compressed by paying more.
Tell the outgoing supplier what is happening, and when. Suppliers who learn about a switch from a forwarder's paperwork behave worse than suppliers who are told directly, and the ones who are told usually want the remaining orders to go well.
The files that make a transfer possible are the ones a supplier has no reason to send after the relationship ends. Collect them while the account is still active, and collect them without announcing why.
The specification. The current version, with revision dates, not the version from the first order. Include tolerances and the measurement method.
The bill of materials. Every component, its source where the supplier will share it, and which parts are bought in rather than made. This is the document that reveals where the real dependency sits.
Artwork and packaging drawings. Print files, dielines, label layouts and the colour references. Ask for the working files, not a PDF of the artwork.
Test reports and certificates. Product testing, material certificates, regulatory approvals, and the standards they were tested to. Check whose name is on each report, because a report issued to the factory describes the factory's product.
The approved sample. Signed, dated and photographed, retained by you rather than by the supplier.
Ask for these as part of routine file maintenance rather than as an exit request. A supplier asked for the current specification during a normal order will send it. A supplier asked during a dispute will not.
The money side of an exit is usually small and always disproportionate in effort. Four items settle it.
The final balance. Pay what is owed for goods received, and only for goods received. A supplier who is being replaced has less incentive to resolve a quality claim after the last payment, so tie the balance to the final inspection rather than to the shipment date.
Credit notes. Outstanding claims, short shipments, rework costs. Get them applied to the final invoice rather than promised as a future credit, because a credit with a supplier you no longer use is a number that will never be redeemed.
Warranty. The obligation survives the relationship. State the period, the remedy and who pays freight for a warranty return, and be realistic about it: enforcing a warranty against a former supplier is possible and slow.
Tooling transfer costs. Crating, transport and any refurbishment. Agree who pays before the mould moves, because a mould sitting on a loading dock waiting for a payment decision is a mould nobody can use.
Get a closing statement in writing: no further obligations on either side except the warranty, the tooling and any confidentiality that survives. A short letter is enough, and it prevents the account from being reopened by an invoice six months later.
Chinese manufacturing is a small world within a product category. Factories in the same cluster know each other, and a buyer who leaves badly is discussed.
That does not mean staying with a bad supplier. It means leaving in a way that leaves the door open, because there are real situations where the new supplier does not work out and the old one is the fastest route back into production.
Three habits keep the door open. Pay what is genuinely owed, on time. Return the tooling and the samples that belong to the supplier, if any. And state the reason for leaving in commercial terms rather than personal ones: capacity, price, a change in the product. A supplier told they were too expensive may quote again in a year. A supplier told they were dishonest will not.
Keep the file. The specification, the inspection reports and the correspondence are useful to the next supplier and occasionally useful in a dispute. They are also the record that makes a return conversation possible without starting from nothing.
The relationships that survive a bad year are usually the ones where both sides behaved well in the month it ended. That month is decided by what was written down in the good months.
Q How do I know when to end a supplier relationship?
Two quality failures on the same characteristic, a technical contact who no longer answers questions, or a price change with no explanation are the practical signals. One failure is an event. A pattern is a process that has stopped being controlled, and that is the point to start the exit rather than to negotiate.
Q Who owns the mould if I paid for it?
It depends on what the documents say. Ownership should be stated in a tooling agreement at the time of purchase: what the tool is, what it cost, who owns it, where it is held and the buyer's right to remove it. Payment alone does not establish title, and amortising the cost into the unit price does not either.
Q Can I move a mould to a new factory?
Usually yes, if you own it and the agreement says so. The practical work is crating, transport, refurbishment and the new factory's validation of a tool they did not build. Agree who pays for the move before the mould leaves the floor.
Q How long should the overlap with a new supplier be?
Two quarters is realistic on a proven product with existing tooling. Longer where new tooling, regulatory testing or packaging changes are involved. The test of readiness is two consecutive runs that pass the same inspection criteria as the incumbent.
Q What should I collect from a supplier before the relationship ends?
The current specification with revisions, the bill of materials, artwork and packaging working files, test reports and certificates, and the signed approved sample. Ask during routine file maintenance, not during a dispute, because after the relationship ends nobody answers.
Q Should I tell the supplier I am switching?
Yes, and early. Suppliers who find out from shipping paperwork behave worse than suppliers who are told directly. A clear commercial reason, a paid balance and returned tooling keep the option of going back, which is worth having if the new plant fails.
Related pages
If production is moving to a new plant, tell us the old and new addresses and the dates. We will tell you how to overlap the two so the first shipment from the new site does not arrive after the stock has run out.
Email sales8015@goodhopefreight.com | WhatsApp & phone +86 133 9216 2503