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Strategies to Keep Costs Low when Buying in China [podcast]

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Supplier ManagementMy friend Mike Michelini recently invited me to talk on the Global From Asia podcast and to discuss the topic of 5 Biggest Challenges in Importing from China and How to Manage Them. We spent about half the time talking about ways to avoid price increases from Chinese suppliers.

Here are a few points we touched on:

  • Chinese suppliers want to maintain or even increase their margins, and they tend to take any occasion to raise prices.
  • The RMB/USD rate, labor costs, and raw materials have tended to increase over the past 10 years. However, this is not true right now with the stagnating RMB rate and the drop in the oil prices.
  • In spite of international commodity prices (available for free on the internet), suppliers often say “prices have gone up” with a straight face. Buyers should collect data and use that information to challenge their suppliers.
  • Labor costs usually only represent 15% of total costs (very variable depending on the industry, but an extreme is shoe production where the number is about 25%).
  • Importers should right-size the suppliers they work with. For small orders, don’t try to work with large factories. For very large orders you will easily get good pricing from reliable manufacturers.
  • Rather than trying to compress the final assembler’s margin, look at your supply chain from A to Z. For example, try to reduce the nature or the consumption of materials.

If you have interest in doing business in Hong Kong and China, make sure to visit the Global From Asia podcast. From the home page, scroll down and you will see a selection of good interviews.

Comments

  1. I agree to most of your opinions, but not “they tend to take any occasion to raise prices”. Years ago, trading companies play an importance role in exporting, but now more and more manufacturers are exporting directly because of the promotion of local commercial authorities. The competition is getting more and more fiercely because the products are highly similar. Each player knows the market and setting a targeted profit rate is the choice of most manufacturers.

    • This is correct, but the story is different once a business relationship is established, especially if the buyer is “hooked” (for example the factory owns the molds, so switching costs are high). Naturally there are many exceptions. I was writing about the “average” behavior.