A common fear that importers have when outsourcing product development and/or manufacturing to Chinese suppliers is that they will suddenly increase prices without warning.
After doing months or even years of work to prepare to launch your new product, you may feel obligated to pay these new prices even if they are more than what was originally quoted, rather than start the sourcing process to find a new supplier all over again.
Here’s a real example a client experienced (no identifying information provided) of when suppliers raise prices unexpectedly, with some advice from us…
Question
“Our supplier hit us with a couple of significant price per unit increases during the development of our product.
We worked together on product development and they committed some resources to it, so an increase from the initial price was expected.
But now they’ve given us another final ‘production price’ which is quite a lot higher per unit. This doesn’t seem reasonable. Is it?”
Summary of the company’s situation
- The company worked on sampling with the supplier for a few months.
- The supplier knows they have a tight schedule and so can’t afford to start development all over again with a new supplier.
- As they got to a final approved prototype, it required a change in a component, and the price of the whole product almost doubled – even though the new component uses and actually consumes less of the same material as before.
- The supplier’s only explanations were that the material cost from their supplier(s) increased, and that development took longer than anticipated.
- The company does not have access to the BOM (the list of components, the materials they are made of and the amount of material they consume, the pricing and the source of each component).
- The company is now effectively forced to place an order at this level of pricing if they want to stand a chance at launching production in the coming 1 or 2 months.
Answer
Price rises, especially without warning, are always unwelcome. In a case like this, it can go either way.
It could be that raw materials costs truly have risen and the supplier is simply unable to source the materials or components in your BOM at the prices they originally found them at (costs have been rising for many materials over the past couple of years or so, that’s for sure).
On the other hand, your supplier may be gauging more profit from you because they believe that they ‘have you over a barrel’ as you’re so close to going to production that you will just accept the costs in order not to delay the project. If you have customers waiting or need to get products delivered in time for, say, Christmas, delays are a legitimate concern.
So, we need to put some pressure on the manufacturer and look into the cause of the increase more forensically.
How to put pressure on the manufacturer
Show your displeasure
First, you should not show them that the price rise is acceptable. You should express shock and ask for a breakdown of the cost per component of the product. You should ask which material, specifically, went up in value.
If they see you can afford to pay that much, they will probably refuse to reduce the price. In fact, they might actually start to wonder how much further they can push you before you say no…
Use a manufacturing agreement
You need to make use of a manufacturing agreement. This not only protects your IP but also makes your relationship and responsibilities clear. A stipulation to include that would help in this case would be something like the following:
Once the prices have been determined, MANUFACTURER must give BUYER at least three (3) months’ notice before requesting any changes in pricing. If the increased floating price is more than 10%, MANUFACTURER should give out the rational price increase reasons with evidence, like the price increase of raw material.
This would give you the right to request evidence that is specific to your product.
Reject the notion that ‘development took longer than expected’
You should firmly reject the supplier’s claim that development took longer than expected and, therefore, you should pay for it. If they had made a realistic estimate of the development workload, they would not be in that situation. The need for several rounds of prototype sampling comes from things that are largely under their control (how well they make the samples, for example). An exception may be if you requested a quality of finish on the prototypes higher than what they were initially tasked to do. In that case, they probably have a case to increase costs to an extent.
How to find out why they decided to increase the cost
Next, try to find out what’s behind this unwelcome increase.
Challenge that the increase is ‘due to one of their suppliers’
Your supplier is almost certainly keeping track of the ‘market price’ of the main components of the products they manufacture. They are not likely to be ‘taken for a ride’ by their suppliers (perhaps only if you actually directed what supplier was to make what component in the agreed contract).
So, don’t buy the excuse that it is due to one of their suppliers. It will be helpful for you to check the recent market price and use the data to challenge them. Ask them: “If the cost of ABC component is X RMB, why is your supplier selling it to you at Y RMB?”
Are your orders ‘too small?’
Your supplier might have realized that your orders are going to be small. Perhaps, smaller than they anticipated if you had to revise your forecast. If that’s the case, this may be a last-ditch attempt to extract more margin. That’s a common reason.
They’re playing ‘bait and switch’
Your supplier may be playing dirty. That’s the same idea as “bait and switch,” and, unfortunately, it’s common if they hold too many of the cards in the relationship with customers (you don’t have a manufacturing agreement, access to the BOM/supply chain info, product designs, etc).
Your product is proving to be harder to manufacture than expected
Your supplier may have realized that your product will be harder to make than they anticipated (maybe it requires more complicated workmanship, a higher quality standard, etc). That’s also common, as suppliers tend to be overly optimistic in the sales stage only to later realise that they’ve overpromised.
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Do you find yourself in a difficult situation with a Chinese supplier? Let us know and we might answer your questions in a post like this! Contact us here.
Other helpful content
You may also find these posts and podcast episodes helpful in this case:
If you’ve exhausted all possible avenues and your supplier won’t budge and, if it’s feasible to do so, switching to a new supplier could be a solution to your problem. It doesn’t have to be as painful as you may think, as we outline in this free eBook…just remember to put protections in place that will prevent the same scenario from occurring again! Get your copy here: How To Switch To A Newer, Better Chinese Manufacturer? [eBook].
You can also read our entire ongoing series of posts about disputes with Chinese suppliers here.
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