For most importers, reducing the cost of the products they purchase in China means negotiating with suppliers and pushing them to accept lower margins.
Does it make sense? In many cases it certainly does. Some suppliers send quotations based on a very high margin — for molds or LEDs the markup is sometimes over 100%, even for high volumes!
In these cases, it makes sense to keep the supplier’s margin down to a reasonable percentage. The best to achieve this objective is to know your product’s normal price by getting a number of quotations from different suppliers (generally quotations from 10 different suppliers are sufficient to get a good idea of the “market price”), and by understanding the raw material costs.
However, cost reductions can also come from changes in your logistical setup, or from less expensive components/materials.
Optimizing logistics is not easy in China unless you have a foot in the country. But working on the components is often a source of great savings. Below is an interesting example about LED spotlight products.
Most manufacturers of this type of product only do the assembly (simple operations; limited investment). Regular spotlights are mostly composed of drivers, PCB with leds, heat sinks, and a lens. Smart importers also want to source the components on behalf of the assembly factory when the final price (of the whole product) is not low enough. One brand (Cree) is often at half the price of other suppliers. Labels and CE-compliant drivers can also be sourced directly by the importer at competitive prices.
Altogether, in a project we recently worked on, the final price was reduced by over 30%, for the same quality and while complying with CE. That’s the power of applying the “total cost of ownership” approach!
In fact, factories often do a poor job of sourcing their components. In many cases they use traders/wholesalers and their relatives’ contacts to buy subassemblies and parts.
However, many Chinese suppliers are not ready to let you influence the Bill of Materials (BOM) or give you any type of transparency. They don’t feel comfortable with openbook contracts, since they are afraid the buyer will squeeze their margin. Once you agree with your supplier to work this way, though, you start to own your supply chain — you gain strong control over it.
I should mention that the supplier also benefits from the buyer’s sourcing efforts, since they can re-use the same component suppliers for their other orders (for other customers). Good suppliers will be appreciative and supportive.
To sum up, the “total cost of ownership” approach, combined value engineering, is usually where the highest cost-down potential resides. Make sure you get your supplier support for it.
For further reading: Where are Cost Reduction Opportunities?
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What do you think?
Certainly some good ideas here. You really need to do your homework with competitors before you understand the market price. Let me add two comments.
First, my experience has confirmed that many factories do a poor job of outsourcing components. Chinese suppliers are far too likely to (a) make components in house that should be outsourced to specialists; and (b) not pick outside specialists well, relying on friend and family ties rather than objective evaluation. I think that both of these tendencies can be traced back to history and culture; a lack of trust of outsiders, as well as costly logistics within China. So, working with your suppliers and challenging them to pick the best subsuppliers can yield benefits if they will collaborate.
Second, I have been astonished by the variation in cost across different regions in China. For the past few years I have been working on sourcing some ductile iron castings (typically 10 kg finished weights.) Factories in Zhejiang and Jiangsu provinces have demonstrated great technical capability in engineering, manufacturing, and quality; others in Shandong and Hebei are very rough and inexperienced in export market expectations. (Not to mention more difficult working conditions, e.g. no indoor plumbing at one of the Hebei sites.) As a result, I see a 300% price difference between the two groups. My management has directed me to keep working in Shandong and Hebei despite my glacially slow progress; when we can deliver a product for $20 USD FOB China vs. $50 or $60 he believes my time is worth it. I don’t know if this experience is typical but I would urge those who have only sourced in the most developed provinces to take a look around; you may be surprised. But, be prepared to spend a lot of time on supplier development.
Many thanks Brad for adding to the article. I fully agree.
A 300% difference in price is amazing! Even if the more expensive suppliers don’t factor in engineering costs, if their facilities are bare, if they buy the metal and the electricity a bit cheaper, I don’t understand the price difference. Maybe the metal is really much cheaper there…