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You are here: Home / Supplier Management / How to cooperate with your Chinese supplier series / How To Cooperate With Your Chinese Supplier, Part 16: Bad News from China, Raw Material Prices Just Increased!

How To Cooperate With Your Chinese Supplier, Part 16: Bad News from China, Raw Material Prices Just Increased!

November 24, 2016 by Fabien Gaussorgues

Bad News from China, Raw Material Prices Just Increased!By Fabien Gaussorgues

If you work with Chinese suppliers, you have certainly received a number of messages of this type:

Dear [buyer name]

The price of [main raw material in their product] has increased a lot recently, so we have to increase the price of your product to X.XX USD per piece. We are sorry for the inconvenience caused.

Best regards,

[Supplier name]

How did you react? Did you see it as a lame excuse from the manufacturer, trying to justify an increase of their margin? Sometimes it is true, but not always.

What to do?

First, collect some data. For example, on Steelhome.cn, you can see the prices of copper, aluminum, or nickel:

Raw_Material_Prices_Shanghai

Second, is it fair to increase the price as suggested by the supplier? If the material price goes up by 20%, should the total product price also go up by 20%?

It depends on the percentage of that material in the final cost in your product.

For a forged metal part, metal consumption is the highest cost contributor, therefore a proportional increase makes sense.

However, I have seen situations where the metal only contributes about 50% of the final product cost, but the supplier requested a proportional increase. That makes no sense.

To deal with such situations, you need to know the raw material contribution on the final cost, from the start. If you don’t have this information, I would suggest to run a quick request for quotation (RFQ) with other suppliers to ensure your supplier is still competitive.

Third, should your product cost always increase?

Chinese suppliers are only requesting a change in price when the raw material price goes up. When the price is decreasing, they forget to mention it.. and, if you request a decrease in cost, you will probably be given excuses — typically, they have old inventory, the price is unchanged, and “honestly, we are are still losing money”.

This is the same as my second point. Get some visibility. Run a quick RFQ and check if your supplier is gouging you.

Fourth, what about the RMB (Chinese Yuan) exchange rate with USD?

The same mechanisms are at play here. You will virtually always benefit from indexing your prices on the RMB instead of the USD. RMB payments are more profitable in the long term (especially considering that that China’s currency has been depreciating continuously over the past few years).

RMB-USD-Exchange-2-years

As a summary, buying from China necessitates an understanding of the various factors that impact your supply chain. Raw material prices are critical and can have a significant impact on your operational margin. In addition to controlling your suppliers, you can take other measures such as pre-ordering raw materials to anticipate on an increase.

—

Related articles:

  • How to negotiate a price increase from your supplier
  • 5 solutions against constantly rising prices

Filed Under: How to cooperate with your Chinese supplier series, Supplier Management

Comments

  1. John Niggl says

    November 28, 2016 at 9:07 AM

    Good tips for staying ahead of materials prices to ensure your getting the best price from suppliers in China. In addition to the advice above, I’d add that importers can sometimes review a detailed bill of materials to learn the rough make up of their product. Besides sending an RFQ to other suppliers, this helps some importers determine how material cost increases/decreases should affect the cost of manufacturing.

    • Renaud Anjoran says

      November 28, 2016 at 11:21 AM

      Yes definitely, that’s what many savvy buyers do, especially when they are specialized in 1 product category.

  2. Cory says

    December 2, 2016 at 2:28 PM

    Good tips considering the current panic over the rising raw material prices over the past few weeks. Are there any suggested web sites to keep an eye on to track the coming increases?

    • Renaud Anjoran says

      December 2, 2016 at 3:36 PM

      It depends on the type of raw material. You might want to search for “[material name] price” in Google as a starting point.

    • Renaud Anjoran says

      December 3, 2016 at 12:56 AM

      Here are a few examples of websites where you can get the spot price:
      http://www.custeel.com/en/price.jsp
      http://newsen.steelhome.cn/
      http://copper.ccmn.cn/

      • Martin Getz says

        December 15, 2016 at 1:29 PM

        Renaud,

        Any sources on plastic resin prices and Tin? This would be helpful in educating our customers
        when we inevitably have to have the price increase conversation.

        Thanks,
        Marty Getz

        • Renaud Anjoran says

          December 16, 2016 at 12:27 AM

          Let them check on alibaba.com!


Weekly updates for professional importers on better understanding, controlling, and improving manufacturing & supply chain in China.

This is the official blog of Sofeast.com.

This blog is written by Renaud Anjoran, an ASQ Certified Quality Engineer who has been involved in chinese manufacturing since 2005.

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