This guide covers the key negotiating components of dealing with suppliers and getting your negotiating strategy right. Cultural aspects that may come into play when dealing with Chinese suppliers are covered in the Relationship Building guide.
Key Negotiating Components
Here are the four key negotiating components of a purchase agreement:
- Price. By far the most important element.
- Payment Terms. These refer to how and when you will pay. The standard payment terms for most importers, especially importers doing smaller volumes (below $10,000/order), tends to be 30% in advance and 70% when the goods are ready. Once you have three orders under your belt, you are probably in a good position to re-negotiate more favorable payment terms.
- Lead Time. This is a point most importers negotiate on and even use as a key criterion for selecting suppliers.
Many importers negotiate too hard on lead time and end up:
– Quality problems, because some steps were skipped to save time, or
– Late delivery, because an inadequate lead time was knowingly committed to, so as to win the order.
A better strategy is to find out the industry standard production time for the product and stick to that as much as possible.
- Contract Terms. It is important to think these through and have clauses on inspection standards, lead time, and penalties for delays, and clearly defined dispute resolution mechanisms. The freight term is also important in contract negotiation and is covered in the Ordering and Shipping Basics guides.
Size Negotiating Power
It’s very important in negotiation to assess where you stand relative to the other party. Some factors that influence your negotiation position include:
- Value of your order. Value is by far the most important factor for your supplier. The higher your order value is, the more leverage you have in terms of getting a preferable price and payment terms.
- Purchase history with the supplier. Once you have placed a few repeat orders, you are most likely to get better terms.
- Scale of the supplier. Large suppliers, monopolies of any size, and state-owned companies tend to be a lot less flexible about prices or payment terms.
- Your company’s scale, brand, credit rating. Scale of the buyer relative to the supplier is also a crucial factor. Disney or Coca-Cola can literally dictate payment terms to suppliers.
- Local presence in China. Having a local presence in China often helps you get better payment terms, especially with decreasing the upfront deposit or extending credit.
- Industry competition. Payment terms tend to be more negotiable in industries with high fragmentation, like furniture and computer accessories, primarily because of excess supply.
Formulate Negotiation Strategy
When negotiating with Chinese factories, it’s crucial to know your end goal. For most importers, the goal is to get the best possible price and payment terms for a “defined quality standard”.
The most common strategy a lot of new importers employ is to get twenty quotes on Alibaba, look at the cheapest three, and then negotiate further to get the best deal or cheapest price. This is usually a recipe for disaster. That’s because the shortlisted suppliers may not have the resources and capabilities to deliver a quality product.
A better strategy to shortlist suppliers is to:
Make sure you really know your product, and that you have clearly defined quality standards in as much detail (material, components, specs) as possible, to give you leverage in negotiations.
Request quotes.
Shortlist the suppliers who confirm that they can meet those standards.
Ask more detailed questions so that you can work out the three suppliers who are most responsive, meet your requirements, and satisfy any other criteria you have, like client references and production capacity.
Negotiate With Shortlisted Suppliers
At this point, move the conversation to email, which is easier to track invoices, agreements, and other important documents. For even quicker communication, especially if your emails are going unanswered, use WeChat (some suppliers also have Skype). WeChat is great for sharing short videos and free calls.
If it isn’t becoming too expensive, request samples from all three suppliers. Suppliers don’t necessarily carry stock, and often don’t even have samples on hand. It normally takes one or two weeks for them to make one up and ship it to you. You will usually have to pay for the international courier shipping unless they know that you are serious and there is a large order behind this. Your supplier should be able to provide a quote and ship with their account. If the cost is too high, request photos or videos, but after you have decided on one supplier, make sure that they still send you a sample.
While negotiating, find out for each supplier how many days there will be between their starting production and the goods being ready for shipment. Check out how that varies between busy and non-busy periods and when those periods are. Add a three-week buffer into your planning timeline for a new supplier (half that for a regular supplier).
Negotiate for their best prices, but be mindful that you have already established the market rate, and if you push them too low you risk them cutting corners and your quality suffering accordingly. That said, you may be able to negotiate a further 5% discount.
Contributed by Ash Monga, IMEX Sourcing Services
