Delivery Performance Commitment for OEM/ODM Water Purification Equipment Manufacturers – How to Avoid Factory Closure Issues

In a fiercely competitive and ever-changing market, some OEM/ODM contract manufacturers in the early stages may encounter financial instability, which can lead to operational difficulties during challenging economic conditions or due to the impact of COVID-19. This article focuses on examining how these challenges within water purification equipment contract manufacturing can present considerable risks to both upstream and downstream stakeholders, potentially precipitating financial crises in contract manufacturing facilities. Additionally, we will explore how meticulous partner selection can aid in mitigating the risk of OEM/ODM contract manufacturers ceasing operations, thereby ensuring the punctual fulfilment of your delivery schedules.

I. Termination of a Water Purification Equipment OEM/ODM Contract Manufacturing

On 26th September 2022, in the 111th year of the Republic of China, Yahoo’s stock market app (https://reurl.cc/GAWXxG) reported on a case involving a Taiwanese publicly-listed water purification equipment company. The company faced a significant financial setback due to the closure of its water purification equipment factory in Taichung. The factory ceased operations abruptly, leaving behind a substantial outstanding debt of NTD 536,000,000. This unforeseen closure has triggered legal and financial concerns, depicted in “Figure One,” with multiple suppliers pursuing payment orders through the Taichung Court.

Figure One: Payment Orders Issued by the Taichung District Court, Taiwan

Reference Source: Judicial Yuan Judgment System

II. Why OEM/ODM Contract Manufacturing Factories Face Financial Crises and Closure If you need further assistance or any adjustments, feel free to ask!

There are several common factors that can lead to financial crises and, ultimately, the closure of OEM/ODM contract manufacturing factories. Here are seven key reasons:

1. Market Demand Fluctuations: Intense competition within the contract manufacturing industry can result in volatile market demand, posing a significant challenge to these factories. For example, the COVID-19 pandemic led to the closure of numerous small businesses, adversely affecting market demand (source: ETtoday News).
2. Insufficient Capital: Operating an OEM/ODM factory requires substantial capital investment, including the purchase of raw materials, equipment upgrades, and covering employee salaries. If a company expands too quickly without sufficient funds to manage these expenses, it may encounter financial difficulties.
3. Production Efficiency Issues: Low production efficiency can result in higher production costs, delayed product deliveries, and reduced customer satisfaction. Poor product quality and numerous customer complaints can also lead to financial crises, particularly if there are return and compensation demands.
4. Poor Management Performance: Inadequate decision-making and management errors by leadership can contribute to financial crises in a factory. Factors such as lack of commitment, excessive socializing, or absence of robust systems can lead to ineffective business strategies and risk management, placing the factory at a competitive disadvantage.
5. Inappropriate Investments: Poor investment decisions can precipitate financial crises during business operations. For instance, excessive investments in new technologies, products, equipment, or markets without thorough risk assessments can result in high costs and insufficient returns. This can lead to cash flow problems, an inability to cover daily operating costs, and eventual closure.
6. Rapid Expansion: Expanding rapidly to seize market growth opportunities can also lead to financial instability. Increasing production capacity, expanding human resources, and acquiring new equipment all necessitate substantial financial resources. Inadequate resource management can lead to issues such as uneven resource allocation, overcapacity, and high costs, ultimately causing financial hardships.
7. Inadequate Diversification: Excessive dependence on a single customer or product can expose a contract manufacturing factory to fluctuations in the market and changing demands. If demand from a major customer declines or a product becomes obsolete, the factory may struggle to adapt or find alternative revenue sources. This scenario can lead to financial distress and eventual closure.3

To circumvent these challenges, contract manufacturing factories ought to closely monitor market trends, formulate effective business strategies, exercise prudent financial management, enhance production efficiency, and bolster managerial capabilities. These steps can enhance competitiveness, foster stability, mitigate financial risks, and ensure the long-term sustainability of the factory.

III. The Importance of Financial Management for OEM/ODM Contract Manufacturing Factories

The focus on financial conditions by contract manufacturing factories is vital for sustaining steady operations and preventing financial crises. In intensely competitive market environments, these factories must practise careful financial management to guarantee long-term growth.

1.Establishing a Comprehensive Financial Management System: Contract manufacturing facilities need to establish a comprehensive financial management system, including effective financial monitoring and reporting mechanisms. This ensures timely awareness of the company’s financial health and operational performance. For example, through financial statement analysis, potential risks can be identified, and appropriate measures can be promptly implemented to prevent financial issues from escalating. Moreover, prudent fund management is crucial for maintaining seamless operations. Proper allocation of funds based on market demand and production progress helps prevent disruptions caused by insufficient capital.

2.Increasing Revenue and Reducing Costs: Contract manufacturing facilities should actively pursue strategies to increase revenue and decrease costs. Expanding into new markets and attracting new customers can bolster income streams. Concurrently, optimizing production processes, improving production efficiency, and reducing production costs can enhance competitiveness.

3.Maintaining a Prudent Debt Level: Furthermore, contract manufacturing facilities should maintain a prudent debt level. Excessive borrowing can heighten financial risks and result in burdensome debt obligations. Therefore, these facilities should diligently assess borrowing risks and exercise restraint in managing debt levels. This ensures financial stability, enhances resilience against risks, and secures the long-term viability of operations.

IV. How Downstream Buyers Can Evaluate the Financial Condition of OEM/ODM Contract Manufacturing Factories

1.Bank Enquiries: Downstream buyers can contact banks to inquire about the financial transactions and history of the contract manufacturing factory. This process may involve phoning the bank to gather information, such as instances of bounced cheques, the duration of the factory’s bank account tenure, and the creditworthiness of its accounts. Such enquiries assist in evaluating the creditworthiness of the procurement partner and their financial capacity to meet transaction terms. They also help identify potential financial risks associated with the factory.

2.National Business Registration Portal: By accessing the National Business Registration Portal provided by the Ministry of Economic Affairs, buyers can obtain publicly available information about the procurement partner’s company, including its registered data and capitalisation. This information is crucial for assessing the financial status and stability of the contract manufacturing factory.

Figure Two: Business Registration Public Information Inquiry Service

Reference Source: National Business Registration Portal

3.Company Information Inquiry: The publicly accessible website provided by the Bureau of Foreign Trade, Ministry of Economic Affairs, enables buyers to obtain information about their procurement partner’s company. This includes details such as company data, product imports and exports, and import/export qualifications. This information serves as a valuable reference when assessing the suitability and reliability of the procurement partner.

Figure Three: Company Information Inquiry

Reference Source: Import and Export Firm Registration System

4.Tax Registration Data Public Information Inquiry: The Ministry of Finance’s Tax Portal website offers the ability to access information regarding the company of the procurement partner. This encompasses particulars such as company details, capitalisation, registered business activities, and additional details. This information constitutes a valuable resource for evaluating the financial and tax-related information of the procurement partner.

Figure Four: Tax Registration Data Public Information Inquiry

Reference Source: Ministry of Finance Tax Portal

5.Court Litigation Records: You can check whether the OEM/ODM contract manufacturing factory you are dealing with has been involved in any debt recovery lawsuits through relevant websites. This can provide insights into the creditworthiness and financial condition of the OEM/ODM factory.

6.Competitor Intelligence: Periodically seeking competitive intelligence from competitors of the contract manufacturing factory you are dealing with can provide you with valuable insider information. This can help in assessing the financial health of the contract manufacturing factory.

7.Offering Promissory Notes: If your contract manufacturing factory requests an equivalent deposit when placing an order, you can request the issuance of a commercial promissory note from the factory. This measure helps secure your interests and ensure payment if needed.

V. How Upstream Suppliers of Raw Materials and Components Can Ensure Timely Receipt of Payments from OEM/ODM Contract Manufacturing Factories

To ensure accurate receipt of payments from buyers and responsible delivery of payments to upstream suppliers of raw materials and components,Easywell Water Purification Company follows these best practices:

1. Regular Supplier Invoice Reconciliation: On the fifth day of each month, we reconcile invoices from upstream suppliers meticulously. Every transaction is carefully verified to prevent omissions or errors, ensuring timely and accurate payments and reducing potential disputes.
2. Request Invoices from Raw Material Suppliers and Prompt Them to Invoice: Once we confirm the accuracy of invoices from upstream suppliers, we promptly request them to issue correct invoices. We also send reminders to ensure timely submission and initiate the billing process.
3. Wire Transfers for Payments: Upon receipt of error-free commercial invoices from raw material suppliers, we internally ensure all payments are wired to the respective suppliers before month-end.

VI. Practical Financial Management Practices at EASWELL Water Purification Company

1.Advance Payments: Easywell Water Purification Company utilises advance payments received from customers exclusively for the procurement of raw materials related to customer orders. This ensures the smooth flow of funds without diverting them for other purposes.

2.Accounts Receivable:Easywell Water Purification Company prepares monthly management reports for financial capability analysis.

1. Inventory Turnover Rate (Times): Managing the average speed from inventory to sale, aiming for a high turnover rate.
2. Days Sales Outstanding (DSO): Managing the time it takes from sales to cash collection, aiming for a shorter DSO.
3. High inventory turnover (fast sales) and a short DSO naturally result in a robust cash flow, maintaining a healthy financial condition.

Figure Five: Financial Capability Analysis

3.Debt-to-Asset Ratio: Easywell Water consistently maintains a debt-to-asset ratio below 50%. Generally, a debt ratio exceeding 50% is often seen as a warning sign, and it is advisable to keep it below 60%. A high debt ratio typically indicates that the company is paying a significant amount in interest expenses and faces heightened financial risks. (Source: Kangaroo Finance)

4.Debt Servicing Capability Analysis: In the event of a financial crisis where inventory and prepaid expenses have no value, the company’s ability to service short-term debts can be evaluated using quick assets against short-term liabilities, with an ideal quick ratio of 100%. Easywell Water typically maintains a quick ratio of around 170%. (Quick Ratio: Quick Assets / Current Liabilities)

5.Cash Reserves and Banking Support: To ensure punctual payments to suppliers upstream, Easywell Water is well-prepared financially. We own our land and factory, and our bank extends a substantial credit line, up to five times our monthly operational capital requirements. These measures enable us to navigate unforeseen circumstances and ensure adequate funds for supplier payments. By adhering to these measures, we secure prompt payments to our suppliers of raw materials and components, fostering dependable and mutually beneficial partnerships.

6.Credit Risk Mitigation:

1. Full Prepayment: Customers are required to pay the full amount before shipment to minimise credit risk.
2. Use of China Export & Credit Insurance Corporation: China’s export and credit insurance mechanism enhances transaction security, providing compensation in case of risks to mitigate losses.
3. Release of Bills of Lading After Payment Confirmation: Bills of lading are released only upon receipt of payment, ensuring simultaneous payment and delivery.
4. Credit Release Post Credit Check: Credit is extended only after conducting a credit check and confirming the customer’s creditworthiness, reducing risks.
5. Use of Letters of Credit (L/C): Utilisation of letters of credit with the bank as an intermediary ensures payment security.

VII. How Easywell Water Company Protects Customer Rights in Case of Financial Crisis

Easywell Water Company has maintained strong financial performance throughout its 37-year history and has never faced any financial crises. We have consistently honoured the rights of our downstream partners and ensured timely payments to our upstream suppliers. Through rigorous financial management and reserves, we adhere to principles of sound finance, ensuring the long-term development of YiRui Clean Water Company. However, in order to ensure the company’s long-term sustainability and consider the rights of customers, shareholders, employees, and suppliers, we have developed emergency crisis management measures. In the event of a genuine financial crisis,Easywell Water Company will implement the following steps to protect the rights of customers and upstream partners:

• Convene a creditors’ meeting to reach agreement with Easywell Water Company’s upstream suppliers on debt settlement or opportunities for company recovery.
• In the event of immediate company closure, products unique to customers and lacking market liquidation value will be used to offset prepayments made by those customers, as the most valuable option.
• If customers own moulds,Easywell Filiter Water Company will arrange for their return.
• If orders have been accepted but production has not commenced, Easywell Water Company will unconditionally refund deposits to customers.
• Should customers temporarily be unable to find alternative suppliers offering similar products, Easywell Water Company will assist in locating or recommending alternative manufacturers.

VIII. Conclusion: The primary purpose of this blog post is

1.To serve as a constant reminder for Easywell Water Company to engage in financial planning and maintain financial health to avoid falling into a financial crisis in the future.
2.To share and encourage fellow water treatment industry businesses to focus on financial soundness to prevent adverse impacts on both upstream and downstream customers and suppliers. Easywell Water Company places a strong emphasis on prepayments, timely payments to upstream raw material and component suppliers, maintaining a healthy debt-to-asset ratio, and protecting customer rights. In the event of a financial crisis, we are committed to safeguarding customer rights, assisting customers in finding alternative suppliers, and handling closures responsibly and with sincerity. Through these efforts, we hope to maintain steady growth in a highly competitive market and provide our customers with lasting and reliable OEM/ODM services.

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