How To Negotiate With Suppliers And Manufacturers When Product Sourcing
Want to save potentially thousands of dollars on your next project? Check out these tips from our expert sourcing professionals.
Negotiation is an art, especially when dealing with suppliers. Whether you are a seasoned business professional or a newcomer to the world of procurement, mastering the skill of negotiation can be the key to securing better deals, fostering long-term relationships, and driving your business's success. Negotiating with suppliers involves more than just negotiating prices; it requires a strategic approach, understanding mutual needs, and balancing cost efficiency and quality.
In this comprehensive guide, we will discuss the nuances of negotiating with suppliers. We aim to equip you with the tools and techniques needed to conduct successful negotiations, whether you're sourcing raw materials, services, or finished products. From small-scale local vendors to large international suppliers, the principles of effective negotiation remain crucial.
We will delve into the preparatory steps essential for any negotiation, including market research, understanding your supplier's position, and setting clear objectives. We will explore the dynamics of communication, the art of persuasion, and the importance of building rapport. Additionally, we will discuss how to handle everyday challenges such as price resistance, cultural differences, and language barriers.
This guide will also provide insights into advanced negotiation strategies, including leveraging volume for better pricing, securing favorable payment terms, and ensuring quality and timely delivery. We will highlight the importance of ethical negotiation practices and how maintaining integrity and respect can lead to mutually beneficial outcomes.
Join us as we navigate the complex yet rewarding world of supplier negotiations. Whether your goal is reducing costs, improving supply chain efficiency, or establishing strong partnerships, this guide serves as your roadmap to success in negotiation.
Tips to Dominate Negotiations With Factories
Negotiations are a balancing act between you and the supplier. You want the best price and keep the factory happy to continue working with you. Therefore, I believe that the best negotiations happen in person. However, many of you cannot travel, so we have written this guide to cover both in-person and email negotiations.
1 // Know the real price of your product
After compiling your list of potential suppliers, you should have a pretty solid idea of the item’s actual manufacturer’s price. Remember, when you order, the factory is a business that needs to make a profit. To succeed, you need to know as much as possible about an item. Knowing the real price of a product involves understanding the cost of each customization, the expected price for a range of quantity orders, and the manufacturing process of your item. You also need to know the range of prices and determine what you should be paying for your product. With more knowledge, you can confidently source your product.
2 // Contact multiple factories
Sourcing is a numbers game; the more factories you talk to, the more likely you will find the best one. This step should provide more options and allow you to use factory quotes against each other. Having the most options available gives you a better chance of finding the perfect supplier. Most people start with Alibaba, but it's best to utilize as many resources as possible. If you don’t know of others, check out our guide to Alibaba Alternatives. A bigger net catches more fish.
The more factories you talk to, the more likely you will find the best price. Even after finding one good factory, maintain contact with other factories. You can reference another factory's quote to get a target price. You can use two factories’ quotes against each other to drive prices down, and once you get the hang of it, create a bidding war between two or more factories to get your business. Don’t expect that to happen early, but you can get there with practice.
3 // Stick to your budget
It’s very, very easy to go over your budget. However, before you start negotiating, you should determine your project’s total cost from start to finish. The total cost includes the product, shipping, import, and customs fees, as well as Amazon fees.
First, determine the total cost of the entire project, including a detailed breakdown by quantity. Next, you must include product, packaging, duty, and shipping costs. From there, you should be able to get the total landed cost. Additionally, you should contact Amazon to obtain a quote for the costs associated with your project and then add those costs together.
Here’s a screenshot of the cost part from a recent Validation report we did for your reference :
Product Validation is one of Cosmo Sourcing’s most popular services. You can contact us to have us perform this task. However, if you wish, please look around, as several other companies offer this service, or you can do it yourself.
As a general rule of thumb for FBA sellers, allocate one-third of your budget to buying and shipping the product, one-third to Amazon and FBA fees, and one-third to your other expenses.
4 //Don’t forget shipping
Shipping costs can be substantial, sometimes exceeding the cost of the product itself. Most suppliers provide their initial quotes in EXW (Ex-Works) terms, which indicate the product’s cost to be picked up at the factory. However, other shipping terms, such as FOB, in which the product is delivered to the export port, will cover some shipping routes but have a larger quoted price from your supplier. You can and should negotiate shipping terms with your suppliers and get quotes from a freight forwarder.
If you are confused about shipping terms, check out our Intercom and Trade Terms Guide to learn more.
5 // Negotiate in the local currency
This tip is more expert-level and requires more work than the others. To fully complete this step, you need to be familiar with Chinese exchange rates and the process of paying a supplier; our guide on paying Chinese suppliers can serve as a valuable reference. To make it even easier, it also helps to set up a bank account in China.
China’s currency is the Renminbi, and the unit is the Yuan. As of this writing, the exchange rate is 6.375 CNY to 1 USD. While most factories and suppliers provide quotes in USD, considering the exchange rate and requesting quotes in CNY is also important. When you request a quote in USD, an exchange rate is chosen, and it is not surprising that it favors them over you.
When buying, we ask for and negotiate in CNY, as it’s easier for Chinese factories to work in their currency. However, we provide clients with USD quotes using the latest exchange rates. We always use the most recent exchange rates from www.xe.com. At Cosmo, we have a transparent sourcing process, and you make all payments directly to the factory. Therefore, we can assist all our clients with the payment process and even handle payments when requested.
Of all the advice we give, this is the one that most people call us out on. We often hear from people who claim that we are wrong and that they’ve been sourcing for over ten years, during which time they’ve always received prices quoted and paid in USD. Just because you’ve done it one way for so long doesn’t make it correct. We have been in China for years and compared quotes given to us in USD and RMB, which are consistently lower by about 5-10%. Yes, Chinese businesses will have accounts that can hold USD, but they will ultimately need to convert the money to RMB unless they have a significant business interest in the States. If you don’t believe us, try it and compare your results.
6 // Negotiate payment terms
A 30/70 split is the most common term and what you should expect to pay, although a 50/50 split is not unheard of. A 30/70 payment plan means you pay 30% of the total cost in advance, and the remaining 70% is due upon completion. Completion typically occurs when the product arrives at the port and is signed off by a third-party inspector before being handed over to a freight forwarder for onward transportation.
If they ask for more than 50% upfront, you should be suspicious and consider looking elsewhere. If the factory requests 50% upfront, ensure they are clear about their payment terms and requirements. For example, the factory may sometimes need molds, which can cost thousands of dollars, or it may need to reorganize a production line. There are legitimate reasons, but ensure the factory has one; otherwise, negotiate back down to 30%.
7 // Negotiate better terms after multiple orders
If you’ve been placing multiple orders from a factory and plan to continue doing so in the future, you should consider negotiating a better price. However, since you can provide the factory with a reliable revenue stream, it is in their best interest to retain you as a client, and you can secure a lower price. Factories often prefer a long-term and consistent customer’s stability to one who pays more but is unreliable. There are additional costs that a factory incurs to start a new client, and these are reflected in the original quote. However, after the first orders are completed, those costs are no longer applicable.
8 // Negotiate additional goods in the event of defects
Defects occur; you must agree with the supplier on how to address them when they arise. There are always some products that, for various reasons, become defective. The maximum rate you should tolerate is 5% or less, which is equivalent to less than 3%. When setting up a contract, ensure that you include a section regarding defective products. Assume that about 3% will be defective and that you will pay for anything less than that, and they will be responsible for anything above it.
You can and should hire a third-party inspection service to inspect the goods before they are shipped from the country of origin.
9 // Negotiate Quality and not just price
A Chinese Proverb says, “Buy the best, and you’ll only cry once; buy cheap, and you’ll cry forever.” While cost is a significant factor in selecting a factory, it should not be the only consideration. You should ensure the factory can meet your product's standards and quality expectations. Unfortunately, Chinese factories will often cut corners and deliver bad products. This phenomenon is so common in China that it has a term called Chabuduo. You need to decide if taking extra steps to make a better product, such as double stitching, is worth paying more for. Then, let the factory know and have them agree to perform these steps. You will pay more, but you will get a better product.
10 // It is possible to get too low a price
Again, this goes back to ChabuDuo, the Chinese art of corner-cutting. Chinese factories often cut corners to save money, resulting in lower-quality items. You should be aware of this and plan for it when you encounter it. This is why the previous two steps of negotiating quality are important.
11 // Be polite, professional, and even make friends with them
Be polite, professional, and positive: Just because they work at a Chinese factory does not mean they are not human. On the contrary, they love hearing praise and prefer to work with people they like and enjoy talking to. So offer compliments about products when they do a good job. And ensure that you come across professionals; this will lend you more legitimacy.
In China, a concept called Guangxi is a network based on trust and respect. A good relationship with a supplier is beneficial for a small buyer and essential when working with them for an extended period. Chinese businesses are very focused on making personal relationships. Chinese prefer to do business with people they know and like. If you visit China and meet with suppliers, it’s not uncommon for most of the time spent with them to be spent over lunch, getting to know them outside of business matters. The first meetings in China are almost always personal, and business discussions happen in the second or third meeting. If they like you, expect to have dinner, drinks, and end the night at a KTV (upscale karaoke bars popular in China). Make sure you have a few songs you’re prepared to sing. China is a drinking culture, too, so be mindful of that. The Chinese prefer doing business with people they know and trust, and are more likely to offer a better rate to someone they are familiar with.
12 // Never marry a supplier
I just said that relationships are important, but you must also constantly monitor and maintain contact with other suppliers, even after you’ve made a final purchase. China is a vast country with numerous suppliers, often producing similar products. If you find a better supplier, don’t hesitate to jump to them or order from both factories. It’s not uncommon for a buyer to buy the same products from 2 different factories. Even beyond China, Vietnam is quickly growing as an alternative destination, and with the impending trade war, it is looking even more attractive. By the way, Cosmo has a dedicated team for sourcing in Vietnam.
13 // HIRE A PROFESSIONAL TO HELP YOU
If you’re confident in your abilities, feel free to tackle it yourself, but there’s nothing wrong with asking for help. Suppose you’re sourcing products from China for the first time; hiring a company to help you may be a good idea. You may spend hours, if not days or weeks, sorting out how to source your product. When your time is valuable, you may be better off hiring a partner to help you source. Time spent sourcing is less time building up your new product or company. Working with a professional will take one major item off your mind and allow you to focus on
Of course, we would recommend Cosmo Sourcing (though we admit to being biased), as we have been sourcing and purchasing from China for years. While there are a few reputable companies, ensure that any company you choose has a transparent model and does not operate on a commission basis. You need to find one that will keep you informed at every step. You likely already have enough; investing in a reliable sourcing company will ensure your process goes smoothly and you aren’t paying more than you should for a defective product.
Cosmo Sourcing // Go Straight to the Source!
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If you start a new business, finding products and suppliers for your products is one of many things you need to handle. Our services are designed to handle every aspect of your business in China and Vietnam, allowing you to focus on growing your own business.
We have helped clients from Fortune 500 companies, brick-and-mortar stores, FBA sellers, and brand-new businesses. So don’t hesitate to contact us and let us know how we can help you.