Three days ago, our team audited a factory in Guangdong. This factory produces plastic (acrylic) products, mainly display stands, toys, and plastic furniture. Covering one floor in a large industrial building, the factory has about 30-40 employees. During the tour, I was brought into the “sample room”. This room, which was in the very back of the factory, was eerily quiet; a strange carbon smoke permeated the room as well. Surrounding me were hundreds of “samples”, forgotten in this “wax museum” of broken manufacturing dreams. Plastic desk weights and transparent bubbles, which read “Sioux City Woodchuck’s Club” or “World’s Best Dad”, were neatly stacked on row upon row. My guide gave me a nervous chuckle, “see anything you like?” I
thought, “Wait, I could use that thing?”
Negotiating with Chinese Suppliers and Wax Museums
In the sample room, the supplier had previously produced a similar product that our client needed. With some simple modifications, we managed to save our client more than 30% on their FOB costs. Often we encourage our clients to use a Chinese factories “standard” template product because the costs will be much lower. We have found that the more rigid a design, the less likely you will obtain the low costs you hope. If you choose a product that is similar to the original (wax museum), you can reduce your costs significantly. There are a variety of reasons for this.
Negotiating with Chinese Suppliers and Manufacturing Efficiency
In China, buying raw materials for a factory is always extremely aggravating because of the high minimum order quantities required by many raw material suppliers. State-owned enterprises, the least efficiently managed companies in China, dominate the raw materials sector, therefore, many of the sales people at these companies want big orders. If the order is small, they usually can not be bothered to give a factory the time of day. Thus, if your product design is intricate or highly customized, expect higher prices. Moreover, the tired pitch, “Oh, we want to order a small order first, later, a big order” is not very effective when negotiating with Chinese factories-they hear it everyday. You need to communicate with your supplier to help him or her see the opportunity.
When negotiating with Chinese factories, you should also remember that many operations in China do not have the best internal management procedures. This means that your suppliers forecasting, budgeting, and procurement teams
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may have their own problems. If a raw materials supplier wants a minimum 10,000 unit order, for example, for denim or copper cable, the supplier may have difficulty fulfilling your 200 unit jeans order. They can not afford to assume so much risk. Also, relatively few credit options are available for mid and small Chinese factories. Therefore, their cash-flow can be unstable and difficult to manage.
What can you do?
Communicating with your supplier is the best way to obtain better results. If your supplier can see the opportunity, they are more willing to help you obtain the pricing you need to increase your market share.
Hammersourcing is a trade services business based in Shenzhen, China. We love discussing entrepreneurship in China and negotiating with Chinese suppliers. Contact us at: firstname.lastname@example.org