I have been working with some new bag factories on a project for a Canadian customer and one of the factories has shown a tendency to increase prices. My customer is a little worried about this. She writes:
“My concern would be that I would encounter the same issue I had with my current factory, which is they might give me a satisfactory target price to start with but then subsequent runs would just go through the roof, sending me back to the drawing board with manufacturers. I wonder whether I will need to continuously be sourcing new factories and taking a risk every time I do a production run with a new factory”
This is a good question as price increases are all too common when doing business in China. Some price increases are to be expected given the rising raw materials costs in China over the last couple of years. However, steep and frequent price increases are unwarranted. I have seen the following scenario many times
• First order: Small QTY order goes great. Customer is very happy.
• Second order: QTY on order is increased by customer. Vendor’s cost goes up. There are quality issues.
• Third order: QTY on order is increased by customer. Price goes up further. General quality fade and sporadic serious quality issues.
• Customer looks for new vendor.
How does one prevent this ? There are a few ways I think as follows:
1.) Develop a relationship with your vendor that allows you to talk on friendly terms and openly about price increases and or/production issues. If you are not showing up in China occasionally to visit your vendor and take your relationship with them to the next level, then they will not hesitate to increase your costs. Your absence signifies a lack of concern about both quality and cost and your vendor will likely regard you as just another foreign customer who is trying to profit from China’s cheap labor. On the other hand, if you spend time with your vendor in China you show your vendor you are serious about your business and take cost increases seriously.
2.) Have a few back-up vendors and don’t be afraid to use them. If you let your vendor know that you are prepared to work with another factory that can offer more favorable pricing they may call your bluff and hold firm on their prices. When you do leave, they will make every effort to get you back. I have seen this happen.
3.) Invite your vendor to spend a week at your company. Take them to the large retail stores or malls to illustrate for them how competitive the North American market is. Many vendors are absolutely overwhelmed at the size of US & Canadian retail stores and the variety of product because China’s malls and shopping centers, in comparison to those in the US and Canada, are dinky. If your vendor better understands the issues you face in your own market they will do more to keep prices within your target in China. They will also place renewed interest in their relationship with you once they see that you are their conduit to a potentially profitable overseas market.
In short, if you want to keep prices in line you really need to work on developing a relationship with your vendor. If you are just another customer to them then you can expect to see price increases regularly.