Explanation of penalty items for defective materials
I. Rules for Fines for Unqualified IQC Inspections
As the first quality checkpoint for incoming materials, IQC (Incoming Quality Control) formulates clear fine standards for different non - conformity scenarios:
(I) The inspection of regular materials fails
When the materials are judged as unqualified after IQC inspection, a fine of 5,000 yuan will be imposed on each batch.
Exceptional scenario: If there are quality problems with Party B's products but they have not left the factory, and Party B reports the quality anomaly to Party A in advance and obtains Party A's approval through review (Party A's quality personnel need to issue a written notice for shipment), this batch of materials will not be subject to fines.
(II) Cumulative repetition of the same adverse phenomenon caused by the same reason
For materials from the same manufacturer and the same product series that exhibit the same defective phenomena due to the same defective reasons, when 2 or more batches of defective materials are counted monthly, a stepped fine will be imposed:
- Batch 2: A fine of 10,000 yuan.
- Batch 3: A fine of 20,000 yuan.
- For each additional batch in the future, the fine amount will be doubled based on the previous batch (for example, the fine for the 4th batch is 40,000 yuan, and so on).
*Note: Emphasize the "same cause, same phenomenon" and "monthly accumulation" to prevent Party B from evading repeated non - performance responsibilities on the grounds of "different batches".*
(III) Discount processing for concessionary acceptance/selective use
If Party A decides to accept the non-conforming materials on a concession basis (for direct use) or use them after sorting (manually selecting qualified products) due to urgent production needs, the settlement of this batch of materials shall be made at a discounted price based on the original value.
- The discount rate shall be determined through negotiation between the two parties. However, the expenses to be borne by Party B after the discount shall not be less than RMB 5,000 (that is, even if the value of the materials is extremely low, Party B shall still bear a minimum cost compensation of RMB 5,000).
(IV) Failure to notify about the re - delivery of defective products and changes
1. Reuse of defective products: If Party B re - delivers the defective batches returned by Party A without any treatment (such as no repair or no screening) and presents them as "genuine products" after storage, a fine equal to twice the original value of this batch of materials will be imposed.
2. Failure to report changes: If Party B makes changes to the core factors affecting the quality, such as the design scheme, process parameters, raw materials, production address, and key production equipment of its products, and supplies the products without reporting these changes in writing to the Quality Department of Party A and obtaining written approval, a fine equal to twice the original value will also be imposed.
II. Rules for fines when the defective rate of the process exceeds the standard
Set differentiated fine standards for the defective rates of production processes for different material types (i.e., the defects found when the materials are assembled on Party A's production line):
(I) Electronic components (Resistors/Capacitors/Inductors, Transformers, Transistors, Semiconductors/Switches/Fuse tubes/Power adapters)
- Target value: ≤30 PPM (Parts Per Million defect rate);
- Fine rules: When the non-conformity rate in the current month exceeds 30 PPM, for every 1 PPM exceeded, 5% of the payment for the corresponding usage volume of this material of Party B in the current month shall be deducted.
- Supplementary Clause: Party A reserves the right to claim from Party B the material costs incurred by this batch of defective materials (such as the costs of scrapping and replacement caused by the defective materials).
(II) Printing instruction materials (such as product labels and instruction manuals)
- Target value: ≤100 PPM;
- Fines rules: When the defective rate in the current month is within the range of 100 - 900 PPM, for every 100 PPM exceeded, 5% of the payment for the corresponding usage volume of the material by Party B in that month shall be deducted.
- Supplementary clause: Similar to electronic components, the right to claim back the material cost is reserved.
(III) Structural components and packaging materials (Injection-molded structural components/Metal structural components/Carton boxes/Foam/Plastic bags)
- Target value: ≤900 PPM;
- Fines rules: When the defective rate in the current month is within the range of 900 - 5000 PPM, for every 100 PPM exceeded, 5% of the payment for the corresponding usage volume of this material of Party B in the current month shall be deducted.
- Supplementary clause: Similar to electronic components, the right to recover the material cost is reserved.
(IV) PCB/PCBA/Connector Category
- Calculation method: The defective rate is calculated based on the monthly output plus the number of defective products in the same month.
- Target value: ≤100 PPM;
- Fines rules: When the defective rate in the current month exceeds 100 PPM, for every additional 10 PPM, 5% of the payment for the corresponding usage volume of this material of Party B in the current month shall be deducted.
- Special terms: If the defective products cannot be repaired and need to be scrapped, Party B shall additionally bear the scrapping cost of the board level (the board level refers to the PCBA with installed components, and the specific amount shall be calculated by Party A according to the model).
- Supplementary clause: Reserve the right to recover the material costs.
(V) LCD category
- Calculation method: The defect rate is calculated based on the daily output plus the daily number of defective products (since LCD defects can easily lead to emergency rework on the production line).
- Serious consequences: If the non-conformity causes rework or disassembly of the production line, Party B shall fully compensate for the labor, material and production capacity losses incurred thereby.
- Fine rules: When the defective rate in the current month exceeds 1000 PPM, for every additional 100 PPM, 2% - 5% of the payment for goods will be deducted.
- Handling when the defect rate does not exceed the standard: If the defect rate does not exceed the target, but the defective products are confirmed by both parties, Party B shall pay the cost of the defective products according to the unit price of the LCD or replace the defective products free of charge.
III. Rules for fines on losses caused by defects in the production line and at the client end
When the material defects extend to the production process or the client side, Party B shall bear a more comprehensive loss cost.
(I) Production line shutdown/efficiency loss (caused by batch defects)
If the production line of Party A stops, the efficiency decreases or rework is required due to the batch - related defects of Party B's materials (such as abnormal parameters of a whole batch of materials), Party B shall bear:
- Line stop fees (equipment idle cost, wages of front-line workers on standby);
- Efficiency loss costs (costs of order delays caused by reduced production capacity);
- Rework costs (labor and material costs for disassembling and repairing defective products);
- Other related expenses (such as the rush cost for temporary stock replenishment).
*Note: The specific amount shall be determined through negotiation between the two parties.*
(II) QA confirms the non - conformities for which the supplier is responsible
When QA (Final Quality Inspection) discovers that the materials are defective and the liability is confirmed to be on Party B through failure analysis, Party B shall bear:
Line stop fees, efficiency loss fees, rework fees, and other related fees (same as the line stop rules of the production line).
(III) Returns and complaints from domestic customers (caused by material issues)
In case domestic customers return products or file complaints due to material issues on the part of Party B (for example, when product functional failures are traced back to defective materials), Party B shall bear:
- Line stop cost (cost of production line adjustment for handling returns);
- Material costs (procurement costs of defective materials);
- Labor and shipping costs (disassembly and transportation costs for returns);
- Other expenses (such as customer compensation costs).
(IV) Complaints from overseas customers (caused by material issues)
If overseas customers complain due to problems with Party B's materials (such as a large number of product failures in the overseas market), Party B shall bear:
- All rework costs (repair costs at overseas warehouses or locally);
- The fine amount provided by the customer service department (such as the additional labor generated by customer service);
- Direct fines from customers (Claims made by overseas customers regarding non-conformities);
- Other fees (such as cross-border transportation and customs clearance costs).
IV. Improvement countermeasures: Overtime penalty rules
To encourage Party B to proactively address quality issues, fines are imposed for the failure to submit improvement countermeasures on time:
When the monthly lot non-conformity rate of IQC exceeds the target, or the process defect rate exceeds the early warning target, Party A's Quality Department will issue a "Notice of Improvement Requirements" to Party B, requiring Party B to submit an analysis report (investigation of the causes of non-conformities) and improvement countermeasures (measures to prevent recurrence) within the specified time and return them:
- If Party B fails to reply within the specified time, a fine of 500 yuan will be imposed.
- If Party B is unable to submit on time, it shall clearly inform the Quality Department of Party A of the expected reply time, and implement it after confirmation by Party A.
- Starting point for overtime calculation: The day when the "Notification of Improvement Requirements" is issued.
V. Judgement and Application Rules
(I) Confirmation standards for defective products
- Any defective products shall be jointly confirmed by both parties (Party A shall provide a written notice of defects, and Party B shall sign/seal to acknowledge it).
- After Party A issues a written non-conformance notice, Party B shall complete the analysis and handling (such as on-site recheck and cause investigation) within 3 days.
- If it is not handled within more than 3 days, it shall be deemed that Party B defaults on the liability for the non - conformity (Party A may directly initiate the fine process).
(II) Rules for combining fines
If a single adverse event triggers multiple fines simultaneously (for example, a batch of materials violates the IQC non - conformity rules and causes the production line to stop), the fine amounts shall be calculated in combination (no duplicate deductions, but the total amount shall be accumulated).
(III) Scope of application
All the above fine rules only apply to products in the mass supply stage (i.e., materials in formal mass production); defects in samples (for R & D testing) and small-batch trial production (for process verification) are not included in the calculation.