Providing vendors with target costs

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.

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6 thoughts on “Providing vendors with target costs

  1. Nice article, spot on. To many people get burned just because they fail to do straight forward checks. Been too lazy in many cases. Like fail to visit the vendor before placing PO and prepayment for $300K USD.
    This is why companies like yours do so well, they help lazy people to feel safe…

    Tony

    • Hi Kathy:

      Thanks for the comment. How ya doing ! Happy New Year ! Hope you are well. How is Gabe doing in China these days ?

      再见 (zai jian)

      Sam

  2. I haven’t used a huge number of vendors in China. When I switched from one factory to another, it was for reasons of quality. I paid much more with second factory, but the quality was about 10 or 20 times better than the first factory. The second factory had added on agenting fees. This made the product gorgeous but less competitive. I think the advice you give here is particularly germain if you are doing with the US top 20 firms for quantity purchasing at low/best prices. Thanks!

    • Hi Jill: Thanks for your comments. Yes, there is often a trade off in China purchasing: If you want better quality you have to pay more for it. The problem is that most wholesalers have target costs which are provided to them by their own customers. If they cannot meet those target costs then they don’t get the order. My point is that you really should pass on your targets to your vendor. This will save you much time and money. For example, I have a project now sourcing headwear for a client. My client sells this product to a big box retailer. His target out of China is $ 10.00. I give this target to vendors and they either say they can do it or they cannot. Immediately I know who I want to deal with. The process then is narrowing down the vendors who are in the $10.00 range and identifying through sampling who can give me the best quality for that price. Giving vendors a target costs also sends a message to vendors that you know your product well and are organized.

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