In This Episode…
Renaud is joined by Adrian for a conversation about some of the things that smaller companies who are getting products manufactured abroad either cannot or will have great difficulty negotiating with suppliers in China, Vietnam, or other popular manufacturing destinations in Asia.
This list of 9 items will give you some idea about what is realistic if you’re manufacturing lower volumes.
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✅ Introduction – are we seeing progress on vaccinations? Could it be possible for importers to visit China later this year (2021)?
✅ How do you define what a small importer is? – this is relative to supplier size. If your supplier is a micro company then you’re a significant customer of theirs, but on the other hand, if the supplier has tens of thousands of staff and high output then you’re probably a ‘small’ customer. If you place orders in the tens of thousands of dollars, that would also place you in the smaller bracket, whereas large importers are placing orders in the millions of dollars.
A list of 9 things small importers can’t negotiate with suppliers in China & SE Asia
✅ 1. Negotiating with large contract manufacturers – Renaud explains the benefits of the large Taiwanese CMs such as Foxconn who Apple uses, for example, such as their great supply chain management abilities and their ability to negotiate good material or component prices. But despite media attention, these CMs are too large to pay attention to small buyers, and, even if you can work with them, they may not offer as good a level of service as a smaller CM due to you being far from a priority…
✅ 2. Reserving production capacity for the mid- or even the long-term – larger companies have the reputation and orders to reserve capacity with their suppliers, but smaller buyers will face a lot of scrutiny about if their demands are possible. Suppliers will need to be convinced that your forecasts are trustworthy, otherwise, they may consider your business to be too much of a risk for them to set aside capacity just for you.
✅ 3. Negotiating directly with large sub-suppliers – a sub-supplier could be a huge company, like Panasonic or Samsung for batteries or Dupont or Chimei for polymers. For smaller buyers, it’s likely you’ll have to deal with an authorized distributor, although large importers may have the sway to approach them directly and apply for good terms. It may also be that the largest companies swallow up a lot of the capacity and inventory for certain materials and you will simply need to wait for their needs to be fulfilled before you can order materials.
✅ 4. Gaining open-book visibility about the supplier and their costs, facility, etc – understanding a supplier’s cost structure is important in order to make them accountable for cost rises, etc. Asian suppliers will be reluctant to tell smaller buyers information that makes pricing more transparent, such as the number of operators working on your project, material costs, warehouse size, rental costs, staff salaries, etc. Larger importers have the volumes to demand this information in their manufacturing agreement and it’s take-it-or-leave-it for the supplier, but for smaller buyers, they will not wish to be so transparent in order to retain control over prices.
Therefore, for small buyers, doing your own homework about material costs and wages in their area, for instance, is a key way to getting the information you need to fight back if a supplier drops a surprise cost increase on you.
✅ 5. Forcing the factory to use your own ERP system – very large buyers want the suppliers to feed multiple pieces of information into their own ERP system in order to track production progress, analyze, know about delays, how much inventory is on the way, etc. Small importers often don’t even use an ERP, but even if they do, they should only put very simple demands on the suppliers due to their size. Renaud gives an example of a customer who gave suppliers a simple 4-point system to implement in return for faster payments which was a successful way of approaching this.
✅ 6. Negotiating ‘open account’ payment terms – suppliers are more likely to produce their products for large customers with a 30/60/90 day later payment schedule, whereas most smaller buyers will need to pay 30% in advance and then a balance payment of 70% after inspection or, at best, after shipping. It’s very hard for smaller buyers to negotiate better payment terms than this from Asian suppliers.
✅ 7. Negotiating product warranty & liability from the supplier – large companies will negotiate refunds for manufacturing defects, etc, in advance as a part of their contract and suppliers will try to build this into their prices. But smaller buyers will find that requests for any kind of liability from a supplier will fall on deaf ears. Therefore, performing product inspections is a critical way to protect yourself from receiving defective products if you’re buying smaller volumes.
✅ 8. The ability to physically shape the supply chain – a very large buyer may be able to influence their supplier to open a new facility in a different country. An example of this is Apple whose CM opened a North Vietnam facility so products can be assembled there to avoid American tariffs on China-made goods, while still being close enough to China in order to obtain components from there. Of course, smaller buyers will not be giving suppliers enough business for them to undertake this huge investment in time and manpower to set up operations in a different location or country, so your option is to source an existing supplier in that location.
✅ 9. Having their own teams on site all the time – large companies have staff based in China, for example, who travel around the country checking on production, quality, etc, in suppliers’ facilities. However, small importers simply won’t be able to sustain this level of staff based abroad and, in ay case, for smaller organizations, it makes more sense to outsource auditing, inspections, supplier management, etc, to specialists who are already based in your supplier’s country (like our own company, Sofeast!) as and when you need it.
- 9 Things Only a Large Company Can Obtain in China/Vietnam
- Low Volume Manufacturing in China for Your New Product
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