4 Ways to Combat China Price Increases without Raising Prices to your Customer
By Marshall Taplits
Inflation in China is soaring and price increases are being exported to the developed world. Customers are finding that factories are increasing prices almost weekly or biweekly depending on the product. Customers requiring their price quotes in US Dollars are finding their quotes only good for one or two weeks.
On the other hand, your distributor or wholesale customers will not accept price increases every week, nor if you’re involved in retail will the final consumer accept this. Even if they did accept the price increases, it’s not cheap to update your catalogues, your websites, re-train staff, etc. Given the fact that inflation is real and that prices will increase, how can you best plan for this and minimize the negative effects to your business? Readers of SourceJuice are sending emails, asking what we recommend to help them through these difficult times.
SourceJuice recommends you to take a good look at the products you’re selling and sourcing and do an analysis of ways you can decrease production costs, while still maintaining the quality of your products. We’ve developed a top 4 list that can help get you started with your analysis.
1. Adjust Your Packaging Size, Colors and Materials
Packaging often makes up a significant cost of the final good you’re manufacturing or sourcing. There are many ways to adjust your packaging that can help you save on costs without affecting the final product, and possibly not even the perception of your product in the marketplace.
Are you using a metal case? Steel and other metals have increased in cost drastically. If you’re using metal in your packaging, can you switch to plastic? Can you produce a slightly thinner case if you need to continue using metal?
Regarding colors, printing in many colors and with varying textures can add considerable cost. Can you decrease the number of colors or textures in your packaging?
Regarding size, can you make your package smaller? Can you take out some layers of packaging? Can you requiring a smaller number of different materials to be used, thus gaining economies of scale and simplified assembly?
2. Decrease Transport Distance Required for Final Assembly
The price of oil and thus transportation is increasing. With oil now well over $130USD per barrel, look for ways to reduce transportation distances. The most obvious example is to source closer to your final customer. However, even when you need to ship the final product long distances, you may still be able to optimize your supply chain here.
For example, do you manufacture a final product that requires the assembly of components from multiple factories in multiple locations?
If yes, you might consider consolidating your factories within more of a reasonable distance. We’ve seen customers make their final product in Guangdong province but they have a ‘legacy’ factory in Tianjin for one of the components. Each time they want to run of a line of product, they must ship goods from Tianjin to Dongguan by rail or road. Once they relocate this factory to near Dongguan, they will save themselves costs on shipping as well as time.
3. Cut Out the Middleman
Trading companies and 3rd party companies have their place, especially when they act as project managers and quality assurance specialists.
However if your product requires multiple components and you are purchasing some components from trading companies that aren’t adding value, cut them out! Moving further back on the supply chain and working directly with factories will help you to get the lowest cost possible.
4. Push Back on Price Increases
Do not just accept any price increase that a vendor or factory comes back to you with. You need to make sure that the increases they are requesting are legitimate.
For example, if the price is increasing because of a VAT rebate reduction, you should reference the VAT rebate chart to confirm your product is actually effected. You should also try to have the factory prove to you that they actually even paid VAT in the first place, as many factories don’t and are using this issue as a way to increase profits.
With regards to currency fluctuations affecting price increases, try to start having the prices quoted in Chinese Yuan (RMB). Yes, you will still experience fluctuations in price, but these will be market driven as opposed to having to renegotiate prices regularly with the factory.
Additionally, if price changes are because of raw materials cost increases, reference back to global prices and make sure that the increase your factory is quoting you is in line, at least within a reasonable percentage, to the changes in the global market for that commodity.
SourceJuice is here to provide you with on the ground information from China, relevant to your sourcing and product development needs. Please visit our website and join our RSS feed or mailing list to keep updated with the latest trends in sourcing.
June 20th, 2008 at 7:12 pm
And these people are supposed to be epxerts? Please if you want real advice talk to experts - dont read basic common sense! Cannot believe this was published - what a waste of time!
June 21st, 2008 at 3:48 pm
A little harsh on the last comment Kevin…
Another suggestion is to look at sourcing the lower labor costs of more inland western China production. Shenzhen is and southern China and the Eastern seaboard of China is most dramatically effected by inflation of living costs. Western and more inland cities such as Nanjing, Wuhan, and Chengdu have high levels of education and significantly cheaper living costs than the coastal cities. While this may increase the distance your goods may have to travel, the incremental reduction of the cost of living may provide significant production cost decreases. This is especially so if your in the professional services industry and can outsource business processes such as project management to these areas.
June 24th, 2008 at 2:27 pm
Good article. A little applied common sense can achieve quite a lot.
Ben makes a good point. Moving inland and/or to the second tier cities can achieve quite good cost reductions, in many cases, well over what would be needed to offset higher transport costs.
Tianjin (Shandong) is positioning itself as a commerce/tech center, has a good workforce, and has port access. Plus, there are incentives for new businesses. At less than an hour from Beijing via the high-speed rail, it is a much less expensive alternative to the Capital.
Rail transport is a good alternative to paying more for oil and gas (trucking). Zhengzhou (Henan) has great rail connections. Setting up a final assembly facility there could achieve very substantial cost savings over the Dongguan / Guangzhou / Shenzhen area. They had a program (not sure if it’s still in place) to offer significant incentives plus factory-to-port (Qingdao) container transport. (packed and customs paperwork completed in Zhengzhou; direct to port at Qingdao)
June 25th, 2008 at 8:00 am
Tip number 3 – Cut Out the Middleman; this will deliver the greatest reduction in costs.
We have seen a 50% reduction in our sourcing costs when we sourced from the factory directly. In the past, there were some language communication difficulties when dealing directly with factories but, no more; all the factories we work with have English speakers and we find they are much easier to work with than the Trading Company middlemen.
Thanks Marshall; a good article, and also a good reference to remind us of those items to continuously check and re-check.
June 25th, 2008 at 2:37 pm
I am a little surprised at some of the comments. Try pushing back on price increases and you are likely to see supplies halted - at this point in time, local manufacturers cannot and generally will not accept making at a loss - especially if you are paying in USD. Pushing into “the west or inland” results in an immature supply chain. One aspect that needs to be considered further is collaboration throughout the supply chain and with customers. “Bundling” common items - even if they need finishing locally (ie back in the area to be exported to) such as labelling, packaging etc is another great way of reducing costs and freight / logistics costs and gaining enhanced purchase leverage. As an established procurement office, we have been able to work with former competitors in order to leverage better costs and retain sensible margins as a result. It is the time to be creative - collaboration, designing costs out, re-designs, purchasing semi finished items etc will reduce costs and in many cases allow the end manufacturer to re-classify his product and benefit from the VAT rebate accordingly.
October 7th, 2008 at 5:57 pm
Comment or suggestion 1 caught my attention. We are moving to not only redesign our packaging but our product overall. We can never achieve the “Ikea” flat product / package design, but we need to come as close as possible. When I was brought in to turn around my current company, the previous management simply copied the USA designed and manufactured product 100%. No thought was giving to air space, weight, construction and assembly. This was a dreadful 3-5 year mistake. While these items may seem simple, and common sense, I find common sense in short supply in many situations including our current financial sector meltdown.
The other suggestions and comments are also excellent. Remember - think inside the box first! So few people do. Regards, Gene Russell CEO Pilgrim Home and Hearth.