The first big challenge in 2021 to our clients is receiving the cost-increasing requests from factories one after another, while factories expecting that cost can back down after the CNY, it turns out even more seriously, materials keep increasing dramatically are the CNY. The USD exchange rate was dropping from 7 in July to 6.46 in Feb 2021,which gives more cost pressure on factories, they no longer be able to absorb the cost difference as a short term solution, all factories are starting to ask for cost increases from their clients, they don’t take orders with old prices.
So what can you do when you encounter this situation, here SVI provides you 5 advice that of how we help our clients to protect their maximum product margin:
1. Things that must be done when requesting a quote.
- The validity of prices. Always ask your supplier to give you the indexes of the quoted price. Ask your supplier for a validity of 180 days (6 months). This is a big request in this environment but this should always be an ask.
- Find backup suppliers. Always have a backup supplier that you can go to in case the supplier has any problems. Create competitive situations but don’t bluff in this type of environment. You must protect your supply chain.
- Ask the factory to provide a product cost breakdown.
- Use the leverage of your whole company business and growth forecast in barging power when picking up the right size factory.
2. Things we should do with a cost increase request from the factory.
- Never accept any price increase blindly.
- Ask the factory to provide cost-increasing proofs, raw material purchase orders, cost-increasing notices. It is not unreasonable to ask for invoices from their raw material suppliers as evidence.
- Ask the factory to provide a product cost breakdown, it is better to be done at the product development stage and keep in the record. Pull out the history info when it is needed.
- SVI’s cost engineers can study the production procedure, verify the factory cost breakdown. Including raw material cost, exchange rate, and the labor rate.
- Traceback the quotation date and the history material cost to do price analysis and comparison.
3. Things we can do after cost verification.
- A face-to-face cost negotiation meeting to minimize the increasing %.
- Share your forecast with suppliers. Sharing your forecast with suppliers in advance will enable them to buy raw materials in advance. This will hopefully avoid price increases, and will also help you to negotiate the same price for the upcoming orders within a certain period.
- Ask your suppliers to consider a long-term approach stably. Negotiate an extended period of price validity. This could include negotiating PO by PO.
- Look for alternative material with lower cost and similar quality. Study the product structure, function, and production process to find out cost-saving methods.
- Lock the cost matrix, material cost, exchange rate, and tracking the market. Ask for cost reduction as to the matrix methodology.
4. Things to watch out for after cost verification.
- Insist on the last order price. It is very risky since the factory can find other ways to save their cost and won’t let you know, such as less expensive material, less material usages, loose quality control standards. A lower quality product can damage your business, customer loyalty, and buyer relationship.
5. Things we should do if we have an unreasonable cost increase request.
- Same negotiation steps as above, meanwhile, start the relationship with backup factories.
- Do quality inspections strictly in this factory.
Need help on cost negotiation with your suppliers in China? Want to have the SVI monthly cost rend report? Contact the SVI team now.
Click here to download the full report---SVI FULL REPORT FOR FACTORY COST INCREASING SOLUTIONS