Theway to getbest deal is tolearn allwecan beforenegotiating. The more we know the stronger we will be in discussions. We aretalkingof course mainly aboutbuying consumer goods direct from China and/or other emerging exporterslike India and Indonesia for resale in our respective countries.
1. We willlikely negotiatewith ...
1. Manufacturer (factory),or
2. Middle Person between usand the factory (generally called a "trader"),or
3. Ourown Sourcing Agent (an independent personwe appoint to source product and negotiateprice for us).
A"Supplier" iseither a manufacturer or atrader(who buysfrom the factory or from other traders for on-sale to us).
2. We use ourStep 2 knowledge to quickly **** out dud suppliers...
Knowingprecisely what productcertificationweneed, if any(see Due Diligence Step 2) is one thing. But, discoveringwhether the certificateactually exists is quite another. We use thisdiscovery process to quickly eliminatemost, but not all, of the dud suppliers (and,something is not normal if dud suppliers are not chasing our order).
Broadly, each Western country has itsown compulsory Standards for consumer goods.Certificationthata productcomplieswithStandards isissued by an independent laboratory afterrigorous technical tests.There'sUL, and EN and AS and etc fordifferentcountriesseen in Step 2.These certificates / lab tests can cost $10-$50k for a product that retails for just $10.
Words like"Made to UL xxx Standard"are commonly seen on suppliers' marketing and quotation material. However, those words per se mean nothing.I find thatabout70% of suppliers who respond to my buying leads hold no certificate forthese reasons:
1. The suppliermerely believesthe product is made to theStandardbutthe factory has not submitted the product for testing(hence words like "Made to xxx Standard"can arisefrommere belief rather thanfromexistence of an actualcertificate), or
2.The factory's main buyer,not the factory, holds the certificate/sbecause thebuyer itselfobtained and paid for the certificate/s, or
3.The factory has commenced the certification process but the certificate will not be available for a further3-6 months, or
4.The supplier's marketing claims in respect of certificates and quality standardare outrightfraudulent.
Don't forget the Chinese domestic market ishuge. Accordingly,many thriving and very genuine Chinese factories don't really understandforeign "Standards"when they startsellingto the West.
It's easy for a learner-buyerto get hooked into the long process of getting quotes, obtaining samples, doing market research and financial modelling around a product only to discover six months down the track that the projectis pie-in-the-sky becausethe product is notcertified.
In summary, knowing our Step 2 Due Diligencetechnical knowledge and then applying this knowledge in our very first discussion with a supplier is critical to the decision of whether to deal further with a supplier. Typical discussion goes like this:
Buyer: "I needa UL certificate."
Seller: "We make the product to UL Standard."
Dumb Buyer: "Great."
Smart Buyer: "Do you have the certificate?"
Smart Buyer: "Will you send copy of the certificate to me before I order a sample of the product?"
Genuine Seller: "Yes, no problem."
Dud Seller: (any one of 1,000 reasons why the certificate is not available).
3. MOQis a reasonablerequirement ...
Minimum Order Quantity(MOQ) causesmuch tension between buyers and suppliers. The problem is that manybuyers see theirorder as "large" while in reality the ordermay represent just2 minutes of production line time fora largeChinese factoryservicing the world.
It is uncommercial for a factory to deal with buyers who wantjust 2 minutes of its production line time.Basically the job of amodern factory is toproduce goods straight off big production lines directlyinto20' and 40' containers for immediate dispatch to warehouse / shipping.And,middle traders, who buycontainer loadsfrom the factory,arenotvirtual retailers ofjust half a dozenproducts to western buyers.
MOQ isall about "economy of scale".The cost of a job topaint onlyone square metre of our home will vastly exceed the cost, per square metre, to paint our entire home.The planningtimethat went into that one square metre job wasnear the same planningtime as painting our whole home.The same principal applies to a Chinese factory or a large trader in quickly moving goods.Hence the need for "MOQ" else the manufacturer or trader would also be retailers.
Think of a single product asa pyramid where "shop retail" is the base of the pyramid.The closer we get to the base the greater the mass of activity and therefore the greaterprice. Our order worth a couple of million dollars puts us near the top of the pyramid in paying smallestprice but our order for 20 items puts usnear the retail price base.
Buying less thanMOQ for market research:
Buyer: "We understand your 1,000 unit MOQ but we need your help for market research."
Buyer: "Do you think buyers in our country will like your product?"
Seller: "Of course."
Buyer: "We need 100 units to see if you are right."
Seller: "Many people in your country already buy ourproduct."
Buyer: "I know, but we want to sell to [our town / age group / income group / or as applicable]. They don't buy your product.
Seller: "I see."
Buyer: "We want to try your product on 100 of these peoplebefore we buyMOQ."
Seller: "That will cost more than MOQ price."
Buyer: "It's only research. Our research budget isMOQ price. Wemust see if our target market will like your product. We need your help."
Seller: [blah blah and finally agrees]
4. Don't be afraid of Middle Persons ...
Middle traders raise uncertainty in the mind of the buyer.Thebuyer naturally wantsto tracethe manufacturer forbetter price (not knowing the manufacturer has huge MOQ and is not interested).Chinese traders too often try to get around this buyer psychological problem by representing theyare the actual manufacturer.The potboils over when the buyer finds he/she is not dealing with the manufacturer.
Don't be afraid of middle persons who buy large quantities from the factory forresale to Western buyers.Small Western buyers (of less than $1m pa turnover) could not exist without them.But for these traders,near all Chineseproductswould go direct to the Wal-Mart's and other huge chain stores of this world. We need these middle Chinese traders for buying big chunks from factories andon-selling smaller chunks to us. Their margins are typically only around 5-10% (or should be).
If in doubt, hire one of the good little Chinese helpers who arewell know in these forum pagesto sort the wheat from the chaff.These helpers can do some pretty amazing work for aone or twohundred dollars. Might just be the best investment you ever make.
5. Hidden costs ... price is not just price...
Our negotiation posture will include all or many of thesereal costs:
1. FOB price (Price is usually quoted FOB,save where goods are sentby air or courier.)
2.Manufacturer's Warranty (What happens when end consumers claim forproduct replacement orrepair, in context 5-10% is not unusual?)
3. Percentageof defective goods allowable per shipment (There is near no such thing asa shipment "free of defect".)
4. Late delivery costs (What actualfinancial damage will I suffer if my order is not supplied on time?)
5. Supplier's moving input costs (What happens if the cost of raw materials to the supplier sharply increases before my order is produced, in context the supplier will usually request me to pay more despite a quote thatlooks like fixed price?)
6. Product Liability Insurance (What happens if I am sued in my own country for manufacturerneglect and/orproduct misrepresentation and the like?)
7. Freight Forwarder Issues (Particularly forBroken Container Loads - BLCs - in mainland China.)
6. Our negotiating posture,in summary of above ...
1. Are we dealing with Manufacturer, Trader or our own Sourcing Agent?
2. We use our knowledge of Certifications to **** out dud suppliers and to save getting caught up in fruitless negotiations for product we cannot, in any event, resell in our own country.
3. MOQ is a reasonable requirement but the supplier may sell smaller quantity for market research (if we push hard).
4. We are not afraid of middle traders. They are our partners to get around manufacturer's big MOQ requirements.
5. Price is not just price. Many supplier relatedelementsother than the quoted price make up thesupplier's real price and each needs to be negotiated.
And, for a hundred dollars or sowe can hire a smartindependent Chinese helper to assist when the going gets tough.
I trust my little post can help somebody and I know the issue of Hidden Costs in para 5 above needs expansion.