Manufacturing agreements between foreign companies and their Chinese manufacturers typically come with all sorts of clauses dealing with choice of law, indemnification, time of delivery, failure rate, price, payment, and various other contractual provisions. But, it is oftentimes the Bill of Materials that will make or break the success of the manufacturing relationship, but far too often this document is either ignored or given far too short a shrift.

The Bill of Materials is simply a list of the components to be used in fabricating the proposed product. A good Bill of Materials, inserted as an appendix or addendum to an Original Equipment Manufacturing (OEM) agreement, should specify in excruciating detail exactly what the Chinese manufacturer must use in manufacturing the product. A well drafted and precise Bill of Materials minimizes the likelihood of confusion and future mistakes, which in turn saves money. It can help minimize product defects and recalls.

I have seen far too many OEM manufacturing agreements that did not have a Bill of Materials and far too many OEM agreements where the Bill of Materials was not made a part of the contract. Perhaps even worse, I have seen Bills of Materials that were made a part of the contract, but that allowed the Chinese manufacturer to substitute any component in the Bill of Materials whenever it felt like it. There is oftentimes nothing wrong with allowing your Chinese manufacturer to make substitute materials with your knowledge and approval, but there is a lot wrong with a Bill of Materials that gives your Chinese manufacturer complete discretion to substitute in materials.

When a problem arises, you should be able to cross-reference your Bill of Materials with the actual product to see if the correct components are present. When I see Chinese manufactured products with high return or defect rates, the cause is almost invariably the Chinese manufacturer having used cheaper components. But far too often, I also find that there was nothing in the OEM contract or in the Bill of Materials (or in the two of them working together) that contractually prevented the Chinese manufacturer from having done exactly what it did.

If you want to reduce your chances of defective or dangerous product, you cannot just rely on your Chinese manufacturer to do the right thing in terms of your product’s materials or components. It is your responsibility to make sure your Chinese manufacturer is using the correct materials in manufacturing your product. A well drafted Bill of Materials is the first step towards that.

For more on OEM agreements, check out the following:

  • I’m not a specialist on law…and have never handled an OEM relationship. That’s my disclaimer.
    I see a problem with this. BOM must specify exact parts. However, in some industries, part numbers change frequently between proto-type to manufacture. You would have to change that appendix frequently.
    BOMs have a structure, and your manufacturing engineers are going to have to work closely with the lawyer to determine what levels of the BOM can go in the contract. There may be “phantom” parts on the BOM as well as sub-assembly parts which should not go into a contract.
    I think what has to be added to this is the Approved Vendor List (AVL). Who can provide the parts? Usually the BOM list itself does not specify who can provide the parts. It does not even specify if a part is made or bought. Of course, this has a lot to do with how much of the supply chain is decided by the foreign company.

  • Handan

    What about Whoever provides the materials/parts have to provide precisely this, not that?
    Relying on credibility of the Approved Vendors seems to me only slightly less risky than having no AVL. With an AVL, whenever something goes wrong, there would be a ready target of blame, like I used the Approved Vendors, so go catch them!
    Whereas the supplier has be solely responsible for the stringent compliance on material specs, they’ll just have to take care of it.

  • Nat S.

    I could not agree more. When I first started doing business with China a Chinese supplier gave me product that was nothing like what we had discussed. When I pointed this out to him, he pretty much laughed in my face and pointed out to me how there was nothing anywhere in our contract requiring that he use the materials that we had discussed.
    I learned my lesson and since using a fully developed bill of materials, I have had no problems ever since.

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