by Fredrik Grönkvist
The quoted price is often the final qualifying factor when selecting a manufacturer. However, there’s more to a price quotation that meets the eye. In this article, we explain what you must know before requesting a quotation from your supplier, and what you must look out for once they land in your inbox.
A unit price is based on four factors, as specified below:
A products materials, components, functions and dimensions are, of course, defining the factory price of a product. While this is obvious, what you may not know is that most Chinese manufacturers operate as OEMs. Hence, while many suppliers can indeed provide long lists of ODM, or factory, products – they tend to lack internal quality guidelines. The buyer is expected to communicate all product specifications, even when buying ODM products.
As such, a quoted price is of no use, unless the supplier lists all specifications. Be on your guard, as they may deliberately leave gaps in the specification – in order to reduce the unit price. Whenever you do receive a price that is far lower than those quoted by competitors, the price is most likely based on an inferior product. You can only make a fair price comparison, if you do so, specification to specification.
Manufacturing products in compliance with overseas, primarily US and EU, standards and regulations come at a cost. RoHS components are, for example, more costly than Non-RoHS components – and ensuring compliance with the EMC Directive or FCC Part 15 also adds up.
A ‘non-compliant product’ is therefore more expensive than a ‘compliant product’. And, Chinese manufacturers will not quote a price based on a compliant product, unless you communicate that this as a requirement.
The larger the quantity, the lower the price. However, keep in mind that manufacturers, unlike wholesalers, operate on lower margins. They have little room for price reductions, and volume based price reductions tend to pan out once reaching four to five times the MOQ requirement.
The incoterm defines at which stage the cargo is transferred from the buyer to the supplier. The incoterm is always priced into the unit cost, and has therefore a major impact:
EXW: Buyer must arrange shipping from the factory floor, and export clearance. The manufacturer is only responsible for production and has no role in the shipping.
FOB: The supplier is responsible for shipping to the port of loading, for example Shanghai or Shenzhen, and export clearance. The buyer must arrange forwarding from the port of loading.
CIF: The supplier is responsible for shipping to the port of destination, for example San Francisco or Felixstowe. The buyer must arrange unloading and domestic forwarding.
DAP: The supplier is responsible for shipment all the way to a specific address, for example your warehouse or office.
Obviously, a quoted price based on EXW is far lower than a price based on CIF, or DAP, terms. Before you can say anything about a quoted price, you must consider the incoterm. Specify to your supplier that they must quote according to a set incoterm, in order to avoid distortion of the price data.
Assuming that you have specified all relevant technical specifications, compliance requirements, quantity and Incoterms – you will likely receive quite accurate unit prices. However, one data point is not enough to determine the market price. Instead, you must include at least 3 to 4 suppliers in your RFQ process.
Assuming you trade with regulated products (i.e., electronics, children’s products and food contact materials), you shall only include suppliers with a verified product compliance track record. You can read more about that here.
As already mentioned, be prepared to receive at least one or two quotations that are above or below the average. In most cases, a rock bottom price can be explained by one or more of the following reasons:
1. The product is not based on the same product specifications
2. The supplier did not price in your compliance requirements
3. The supplier quoted a price based on a larger quantity, than its competitors
4. The supplier quoted an EXW price
Never make a premature judgement based on a price. It’s very common that Startups and SME’s makes procurement decisions based largely on prices that aren’t real – while disqualifying good manufacturers. You simply get what you pay for.
Yes, feel free to communicate your target price, but only after careful consideration. A unit price must either be based on previous research date, for example a quotation of a related product or an outdated quote – or, based on your own margin calculations. Manufacturers have little room for price reduction, so don’t expect them to become generous simply because you give them an unrealistically low target price.
That’s not a clever tactic. You achieve nothing by setting an artificially low target price, other than disqualifying qualified suppliers. Again, you get what you pay for, and your business is always better off if you focus on increasing profit margins rather than shaving a few cents on the unit price.
Fredrik Grönkvist is the co-founder of ScandinAsian Enterprise in Shanghai. Since 2010, he and his team have helped hundreds of companies worldwide, primarily in the EU and US, to develop and manufacture products in China. He is also the main contributor on www.chinaimportal.com, a leading knowledge base for small- to medium-sized enterprises importing from Asia. For further questions, you can contact him on www.chinaimportal.com/contact-us/.