When looking for factories to work with in China, particularly in the south around cities like Guangzhou or Shenzhen, you’ll often run into large numbers of smaller factories. These may not sound ideal, however for many foreign buyers they present optimal business opportunities. With lower prices, acceptable quality, and greater attention to service, they can often be good organizations to work with, especially if your order volume is not attractive to larger factories. Unfortunately, when working in this type of situation over a longer period of time, you will run into high price volatility as smaller factories are either a) more subject to input price changes or b) they are testing just how much they can get away with adjusting the price with you.
Here are some tips that I’ve learned for dealing with sudden price changes and how you can verify them.
The Answer Is In The Details
China sourcing is all about the details (see my earlier post on getting accurate quotations from suppliers or Iris’ post on shipment oversight resolution). A very common reason for price increases is higher material costs as a result of inflating commodity prices. This is a legitimate reason for prices going up, however this doesn’t mean it happens to be the case in each situation. Make sure you’re not just being fed a story.
Compare Against The Market
To verify, you should first ask the supplier which material or component is the source of the increase. Take this information to the market and survey current conditions. Are other products made with this material similarly going up in price? Check commodity prices on exchanges like the LME or secondary market exchanges. This is a good way to initially test the validity of their quote.
Ask For The Formula
After checking the market price, if the quote seems valid, you could also ask for the formula of how they calculated the quote. This way you can directly calculate the costs and get a clearer picture of your overall cost structure. This has two benefits: first it gives you more control over resolving the problem and bringing down costs on your own, and second you can extract more information by gauging the supplier’s reaction. You may think that the supplier would not want to give up this information, however in most cases they will want to keep your business and should be willing to divulge the “recipe”. Conversely, if they are trying to deflect from answering, it could be that they are simply arbitrarily raising prices rather than carefully calculating appropriate increases based on real market conditions.
Gaining Control Over Your Production
I was working with a supplier once that produced aluminum products. He was a relatively small factory and his prices fluctuated every few days. I would often follow up asking the reason, to which he would always retort by blaming it on aluminum prices (which indeed can be relatively volatile). In reality there was nothing unscrupulous about his price changes, but when we eventually got the formula for his inputs we had a much clearer picture of where our price increases were coming from. This also allowed for a system to be put in place where we could regularly verify his price changes with the officially reported commodity price increases that correlated to his input materials.
A Fixed Validity Period
One other tactic to try is to establish a fixed price for a pre-determined amount of time. Naturally, a supplier is unlikely to lower prices when input costs go down but are happy to increase when they go up. If properly negotiated, it can be mutually beneficial to lock in a long term pricing agreement. This ensures a steady stream of business for the factory because they get a returning customer and both parties get to enjoy the benefits of stable prices. Also, whenever the opportunity comes up, you should try and extend/continue expiring agreements.
Fluctuating prices are a natural part of the procurement process no matter what country you are buying from. The situation in China can often seem opaque at times, however if you remain diligent about details and remember that the factory usually wants to do what is necessary to keep you happy, it can help make China sourcing a little less stressful.