In today’s market every penny matters or should we say every RMB. Everybody wants to have the lowest cost and do the best margins, and we definetly know better about how to do it now. There are many simple ways… simple on the paper though.
Step one : Reduce the production costs.
In China, some suppliers would indeed send you incredibly high quotations, with margin up to 300 % and this, even for big quantities.
How to make sure the price is the right one
– Get enough quotations : a dozen should give an idea of the product’s real value.
– Focus on the lower tiers quotation.
Step two : consider Logistic and raw material.
If you want to do business with China, a partner in the country could be very precious. Obviously, most of the logistic companies take margin and raw material prices are kept out from stranger’s knowledge.
Experience
Recently SAOS had a great opportunity to make a Total Cost of Ownership analysis. We were hired to source LED spotlight products.
Interesting fact, most of manufacturers you find working in that field is actually just assembling the spotlights. Activity which does not require any high investment.
In fact, regular spotlights are a combination of drivers, PCB with LEDs, heat sinks and lens.
To get the best prices, we investigated about the raw components on behalf of the supplier. As expected, we found parts, LED Cree brand, labels and even CE compatible drivers, to mention them, at half price.
Finally, not only the price was cut 30 % down but the product also matched the specifications in both quality and standards.
We, therefore, could verified the strength of the Total Cost Ownership Method.
Openbook contract : healthy starting point
Surprisingly, factories are not that good at sourcing. In fact, they ‘d rather use traders or go through their “guanxi” (understand “network of influence”) to get the different components. They will not access directly to their competitors.
Bills of Material (BOM) are difficult to get. Transparency is not an easy thing to secure, especially when some extra margin are hidden. That is why Openbook Contracts are not so easy to negociate.
Although it is the best agreement to assure a strong control over the supply chain. After all, the manufacturer could also benefit from this. He could use those new suppliers for future customers. If of course, he understands the concept of “long term win-win business”.
