by Dan Harris
Helping American and European companies deal with their China manufacturers is something my firm’s China lawyers do every single day. And though our work focuses on the legal side, our having been involved with literally thousands of manufacturing related contracts (mostly NNN Agreements, Product Development Agreements, Licensing Agreements, and OEM Agreements) does mean that we are pretty tuned in to what works on the business and sourcing side as well.
So when I saw someone on Linkedin (please check out our thriving China Law Blog Group there!) link over to an article entitled, Supplier Negotiations: 9 Tips for Making the Right Deal, expecting great things. But the article never mentions sourcing from anywhere in Asia and it is in most respects simply not relevant for that. The writer is an Australian in Australia and so I will just assume that it was written for sourcing within Australia and examine whether and how each tip applies to China sourcing or not. Note that this is NOT an attack on this article, it is merely a contrast piece as to how sourcing from China can differ from sourcing from the West and to stimulate thinking and discussion on the best tips for sourcing from China.
The italic portion below are direct quotes from the article. The regular font portion are my own comments.
- Learn about the supplier’s products, processes, costs and market. You’ll be your own best advocate only if you understand a supplier’s processes and its operating environment. By talking to a number of vendors, you’ll learn the industry jargon, the products available, as well as the expertise of individual suppliers. This information will be valuable during negotiations with a supplier, particularly in evaluating concessions that your supplier might consider. This does apply to China. We are always telling our clients to go visit their own factories in China and other factories and not just rely on what they are hearing from their agents or the factories themselves. This website quote from co-blogger Steve Dickinson rings very true here: “A day on the ground is worth a month in the office.”
- Become a value-added customer. Before you enter negotiations with a supplier, consider how you can help the supplier realise the value in other aspects of his business. Doing so can turn a business transaction into a strategic partnership. For instance, let the supplier know you are a source of repeat business and make the company aware of how much business they can expect based on your purchase history. My strong sense is that this does not work for China, which is in many ways unfortunate. Chinese factories have had so many unfulfilled promises of future large orders that I think they mostly just ignore them. In fact, I sometimes wonder if making this promise might actually hurt in a sourcing negotiation. What do you think?
- Change your demand pattern. You can revise your purchasing policy by consolidating your purchase orders. For example, rather than authorising individual departments to issue purchase orders to one supplier, require that the requirements be combined in one consolidated purchase order, the size of which must be large enough to earn a price discount.
Also, you might also create a purchasing consortium with other companies and place orders with one or a few suppliers, rather than many. Your company might also switch from one material requirement to a lower-cost product. Sure. Buying more will usually get you a better price than buying less.
- Agree to larger deposits on orders. “Accounts receivable days” affect the cash flow of all companies, so you might agree to a large cash deposit on orders to secure you a significant product discount. For instance, a 50 percent upfront payment might earn a 10 percent discount, or improved delivery terms or product customisation. This does not translate well at all for China, for many reasons. First off, the lower the deposit the safer you will be. Second, most Chinese factories are pretty unyielding on their required deposits and just getting one to agree to a deposit as low as 50 percent would be a real accomplishment. We draft plenty of contracts where the Chinese factory refused to come down from 70 percent, sometimes even 90 percent upfront. For more on this, check out China Manufacturing Payment Terms. Limit Your Risks.
- Agree to high-dollar purchase. If you transfer all of your business to one or a few suppliers, rather than many, you’ll receive deeper discounts and, perhaps, other perks. But before you give your business to a few suppliers, consider the increased risks of doing so. Not sure how this differs from numbers 2 and 3 above. Ordering larger quantities will usually get you a better price than ordering smaller quantities.
- Be a customer that solves issues, not presents issues. A supplier’s profit margin can be eroded by customer production, delivery or quality issues. So to get a better deal, be reasonable when making demands. If by this the writer is suggesting that it will pay off for you to establish a good relationship with your supplier, than I completely agree and this holds true for China as well. For more on this check, out How To Keep Your China Manufacturer Motivated And Why That Matters.
- Implement a bidding process. To ensure competitive pricing, use a bidding process to solicit business proposals from multiple suppliers. Doing so makes it clear your company will buy materials from the supplier that submits the most competitive bid. Yes and no. Yes, in that this can work if you really know what you are doing with respect to your product, with respect to the manufacturing of your product, and with respect to how Chinese companies do business. But if you do not know all of these things you might very well end up with really cheap product, really badly made.
- Consider all aspects of your purchases. Supplier prices may not be nonnegotiable, but other aspects of a purchase, including the down payment, bulk discounts and shipping rates might be. For instance, you might negotiate an enhanced product warranty or extended payment terms, each of which can improve your cash flow. Again, Chinese companies are not big on negotiating payment terms. More importantly, you should always seek to have an “enhanced product warranty” (whatever that means) but at the same time, you should recognize that if your product causes USD$10 million in damages back in the United States or wherever, your enhanced product warranty is not going to mean that your Chinese factory has the money to remedy your damages problem.
- Cease doing business with supplier. As a last resort, you can cancel existing orders and exclude the supplier from future competitive bidding rounds. Before you institute this process, meet with the supplier and ask for a price concession. Also, confirm that another source of supply is available.The most important thing to do before terminating a Chinese supplier relationship is to be prepared for all the bad things that will likely happen from that termination and to have another supplier already lined up and ready to go. For more on this check out How to Terminate your China Supplier: Very Carefully.
And if you want to read more about how to handle your China product outsourcing, check out the following:
- China Product Sourcing. Ten Things To Do To Get It Right.
- Six Tips For China Product Outsourcing
- Who Succeeds With China Product Sourcing?
- China OEM Manufacturing Agreements. The Term Sheet.
- Sourcing From China. The Captive Buyer Issue.
- Vietnam Over China For Small-Scale Manufacturing. Why Didn’t I Think Of That?
- China Supplier Agreements. With Apologies To Kansas.
- The Six (Not Five) Keys To China Quality
What are your thoughts?
Dan Harris is founder of the Harris Bricken law firm, a boutique international law firm focusing on small and medium sized businesses that operate internationally. China is the fastest growing area for the firm. Dan writes ChinaLawBlog.com as a source of China legal and business information.