One of the most important things you can do when you are negotiating with a first time vendor is to give them a target cost. The target cost tells the vendor what you expect or hope to pay, and at the very onset it gives you some leverage in your relationship with them. You are essentially sending the supplier a message that if they want your business they will have to give you the product at a cost which is acceptable to you. I have, however, met people who do not like to give new China vendors target costs, their hope being that what the vendor quotes will be much lower than what they, the buyer, are expecting to pay. I have even read China sourcing blogs where “experts” advise against giving target costs to vendors for precisely this reason. I am always a bit shocked when I see this advice because personally I think that not giving a target cost is a very risky strategy. If you don’t give the vendor a target cost then they may very likely come back with a price that is over, not under, the cost that you have in mind. If this happens you have two choices:
a.) Meet the vendor’s cost which will impact your own margins and will send a message to the vendor that you are a pushover. This will color your relationship with them going forward and allow them to manipulate not only cost but quality and lead-time.
b.) Walk away from the vendor. This is fine unless the vendor has a product that you want. You also risk eliminating who might turn out to be perfectly solid vendors for your product.
A good case in point is a project I am currently working on. I am sourcing a product and I am providing a target costs to all vendors I approach. Most vendors so far have come back and met my target cost. A couple of them have told me that they can make the product at exactly the cost I gave them which tells me that, yes, I probably could have approached them with a lower target cost. Still I am comfortable with the price they have given me. Concurrently, I am having someone in China source the same product for me. This person told me that they are not giving vendors a target cost because it is their belief that the product is in fact worth less than my target ( which seems to be the case based on the quotes I have received ). However, the quotes my Shanghai contact has received so far are about double the quotes I have received, once again because he did not clarify for vendors his expectations about the value of the product.
It is good to remember that “low-cost” means different things to a Chinese FTY and to an overseas buyer. When an overseas buyer thinks he/she is getting a product for low cost, the Chinese FTY may have the impression that the buyer is in fact over-paying for the product. In fact, I would venture to say that most China vendors have always worked under the assumption that foreign buyers will over-pay for product in China. Their initial quotes to you often reflect this mindset – unless you give them a target cost.