Clients often approach us to help them to find another supplier due to the fact that their current supplier has hit them with an unexpected price rise either when they tried to reorder, or sometimes even during production.
Sounds familiar? Read on for our 5 tips on how to deal with this situation.
What causes a price increase?
The reasons might be various, but these are common:
- Raw material costs are more expensive
- Labor costs have increased
- Currency fluctuations between the RMB and your currency
The above factors may legitimately call for a price increase from suppliers, but we also find that it’s an almost ‘general practice’ for Chinese suppliers to increase the prices of your next order, as they are confident that they’ve got you hooked long term. If you can combat their price increases, you take back the initiative.
5 Tips To Help Guard Against Price Increases
So, how to secure your costs and reduce the chances of a supplier giving you an unpleasant surprise?
1. Negotiate an extended period of price validity
The first, and arguably most important, step is to negotiate the price validity with your supplier (at least for 6 month period) and have it written on the PO or in the contract with your supplier. Having that validity is extremely important and will secure you from any unexpected price increases.
Did you know that Sofeast can help you to draft a contract with your supplier for 150 USD? Ask us about drafting contracts here.
It may well be true that the RMB appreciates against the dollar during your cooperation, so having an agreed price over time will help mitigate any currency fluctuations, and also labor cost increases in China for that matter.
You can check the USD/RMB exchange rates in Google easily enough (change the time filter for a longer period view):
2. Understand your supply chain so you can give yourself options
Secondly, and this is what we’ve mentioned before in this post – always be aware of your supply chain so that if you’re quoted a higher price due to the rising component costs, you can switch to another component supplier and secure a suitable price.
Understanding material costs are a part of this too, as you should not take it as read that ‘raw material costs have increased.’ If this is given by your supplier as a reason for a higher price quotation, call their bluff.
You should check online to see if material costs have risen, for example, I did a quick Google search for ‘raw material price China’ and found this interesting and relatively recent PDF about hard goods material costs. You may also try these sites:
3. Share your forecast with suppliers
Sharing your forecast with suppliers in advance will, in turn, enable them to buy raw materials in advance, too. This will hopefully avoid price increases with no need to pay today’s prices which could be higher, and will also help you to negotiate the same price for the upcoming orders within a certain period.
If your materials or components are part of a particularly volatile industry where prices fluctuate and often increase, planning ahead like this could help lock in favorable pricing over working on the fly as needs occur.
4. Negotiate discounts on subsequent orders
If you are aimed at reordering from the supplier, try to negotiate a discount on the next order based on your current volume. Again, those should be written in the contract and signed by your supplier.
This post on price negotiation should be helpful here.
If a price rise really is inevitable, negotiate with your supplier to offer you the next order at the old price one final time with the assurance that further orders are going to be placed after that.
If you’ve shared your forecast and they’re used to working with you, it shouldn’t be too hard for them to trust in your word. But you should also be aware of quality fade too. If you’re cutting your supplier to the bone, it’s possible that they’ll end up taking steps to claw some margin back.
This could be by using lower quality materials, components, or processes than you’re expecting, all in the name of getting you to the price you’re bargaining for and still making a profit themselves.
5. Find a backup supplier/s
Always have a backup supplier that you can go to in case the supplier doesn’t want to cooperate on providing a better price.
It’s best to prepare for this in advance so you aren’t scrambling to find a supplier with a reorder deadline looming. Chinese suppliers will smell any worry over time like blood in the water and act accordingly.
With this in mind, prepare engineering designs, specification sheets, and even a few rough samples on your own if you can. It makes onboarding a backup factory faster and easier.
Did you know that Sofeast can help you to source alternative suppliers? For a fairly simple product, we can do the research, arrange a sample purchase, and perform a sample review for 495 USD.
All the tips mentioned above should be secured by signing an appropriate contract with your supplier before you place an order with them. Having a local project manager to negotiate and be in control of your supply chain, plus having the right contract with your supplier in place will bring you visibility and confidence in the future of your business.
You will also find these posts from our sister blog over at QualityInspection.org useful, too: