Today I was thinking back to a conversation I had with a client of mine a couple of years ago. She was frustrated with her vendor/agent and was beginning to feel that doing business in China was just an endless cycle of trying out new vendors. She wrote as follows:
“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.”
My advice to her at the time was that she needed to find new vendors and spend more time developing relationships with those vendors. Easier said than done because she is a mompreneur and with 3 kids and a red-hot business has no time to travel to China to work with her vendors. But her vendor knew this and she was at their mercy. This is of course not an effective way to do business.
Thinking more about this today and reflecting on some of the other projects I have worked on over the last two years, I have come to realize that doing business in China is pretty much what my client described, a seemingly endless cycle of production runs with new vendors. Even some of the successful companies I work with who have an office in China find themselves going through vendors like I go through a batch of freshly baked oatmeal raisin cookies. The difference is that these companies usually have long-standing relationships with a couple of good vendors and this allows them to fulfill important orders at the same time they are looking for and trying out new vendors. It is essential they find new vendors because they need more production capacity as their business grows and they understand, very smartly, that at some point their existing partnerships may come to an end.
So being successful in China is a lot about managing your expectations. You cannot go into China thinking you are going to find one supplier who will deliver quality product to you at steady prices for years to come. The perfect spouse does not exist. The most you can hope for is to find a good vendor or two who will help you grow your business while you undertake a time-consuming, costly and often painstaking search for new vendors.
But in the end it is worth it because as I often say where else are you going to be able to make a high-end wood and brass picture frame for $ 1.50 ?
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.