If you’re selling on Amazon or eBay you know that just competing on price is challenging. But I’d like to share some secrets I’ve learned managing multimillion dollar sourcing campaigns for my clients. One of the best ways to maximize your margins is to CUT YOUR SOURCING COSTS. In other words PURCHASING FOR LESS will give you more room to price your product competitively and win the buy box. So here are five ways to cut your sourcing costs.
- Reduce your product costs
- Negotiate payment terms to increase your cashflow
- Reduce shipping costs
- Quality control cost reduction
- Consider going out of China for additional cost savings
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1. Reducing your product costs
Reducing your product costs from your supplier is one of the most direct ways to save money. Here are some ways to negotiate lower product pricing with your suppliers.
As your order volumes grow so will your relationship with the supplier. So it’s natural that you can negotiate better pricing as volumes increase and trust grows. Suppliers like larger volumes especially if you share your purchasing plan with expected annual order volumes.
Here’s an example from a recent product I’ve sourced from China. In the first order, we purchased the product at $5.20 per piece from the supplier. We purchased about 500 units in the first order. In the second order, our volume increased to 1,000 units. So we renegotiated the pricing with the supplier and got the same product for only $4.70 per piece! This is a price discount of $0.50 per piece or approximately a 9% price cut. This will have a multiplied effect on your bottom line in reducing your import duties as well as reducing your Amazon and eBay seller fees if you choose to sell at a lower price but still maintain the same margins.
A second way to negotiate lower prices is to leverage other suppliers’ quotations. For example if Factory A is offering a product for $2.00 and Factory B is offering it for $1.90 you can use that as leverage against Factory A. But beware: in China you get what you pay for. If you cut the price too low, factories will cut corners on the product. So don’t go overboard with low price negotiations.
Another opportunity to negotiate lower prices is to take advantage of external economic factors such as currency depreciation. As the Chinese economy is slowing down, the government, which controls the RMB exchange rate, gets fearful that the slowdown will turn into a recession. Long story short, government policy will lower the foreign exchange rate of Chinese RMB against the US Dollar to make Chinese exports more competitive. In fact if you look at the foreign exchange rate in the past 6 months, the RMB has depreciated 4.5% from August 2015 to April 2016. This is a golden opportunity to renegotiate your price to take advantage of the 4.5% depreciation. Basically your dollars are worth 4.5% more against the RMB so you can ask for a 4.5% discount. The caveat is that your current quotations must have been made before the currency depreciation – in this case before August 2015. If so, then you definitely should renegotiate your pricing or you’re leaving money on the table. Note that the factory will not necessarily give you the full 4.5%. They will use other cost increases (labor, material costs, etc) as an excuse but I’ve gotten 2-3% price cuts by sending just one email.
2. Negotiate payment terms to increase your cashflow
Nobody has unlimited money and as your business grows you will want to order more inventory to keep up with growing demand so you can scale your business. A common bottleneck is the amount of cash that you have tied up in your business – specifically in purchasing inventory from suppliers. One of the best ways to free up more cash is to negotiate more favorable PAYMENT TERMS as your order volumes grow and as you build a long term relationship with your supplier. Let’s look at this example.
In the beginning when placing a trial order payment terms normally are split between an “advance payment” or deposit when placing the order and a “balance payment” paid before shipping. When first starting typical payment terms are 50/50 or 30/70. But did you know that you can and SHOULD negotiate this as your business grows? Ultimately it is about TRUST and the more they trust you, the better terms you can get.
One of my previous clients had been doing business for many years with several Chinese auto parts suppliers. In the beginning the suppliers would only offer payment terms of 50% advance / 50% before shipment or 30%/70%. Later as the client’s order volumes grew to $20k to $30k per month so the trust. Eventually the suppliers agreed to payment terms of 100% after shipment.
Ultimately it is about TRUST and the more they trust you, the better terms you can get.
You can see in the chart below that typically buyers start off in scenario 1 (50/50) or scenario 2 (30/70). Better payment terms would be scenario 3 (essentially meaning that you don’t have to pay for the goods until the supplier finishes production and you inspect the shipment. This can free up your cash flow tremendously to invest it in other parts of your business (or paying yourself first as Rich dad says).
As a side note, the big players like Walmart can get payment terms of Net 30, Net 45, and Net 60 which essentially means they don’t have to pay for the goods until up to 60 days AFTER SHIPMENT. But they can do this because they purchase enormous volumes and have the buying power to negotiate these terms. I suggest you focus on getting to at least Scenario 2 or 3 as your business grows.
3) How to reduce your shipping costs
There are many ways to lower your shipping and logistics costs. If you are shipping by air freight then you know that it’s not cheap. One way to save money is by using the supplier’s pre-negotiated air courier rates which are lower than what you can negotiate with the shippers. Suppliers typically ship substantial volumes so they can negotiate a lower rate with an air courier than you can as a single buyer. You can take advantage of their Fedex, DHL, or Air Express Couriers to get lower pricing. Many Amazon sellers have used Air Express Couriers with success. Their rates are cheaper than the major international shippers such as Fedex and DHL. Be sure to get a tracking number and some references to protect yourself.
As your volumes grow and if you are shipping larger bulky items, then sea freight is the best value. However be prepared for longer shipping times (typically 30-45 days depending on the destination) and more bureaucracy from import and customs procedures. In this case I recommend hiring a freight forwarder and customs broker to handle this work.
4) Quality Control Cost Reduction
If you ever had quality problems then you know that this can get very expensive and very frustrating fast. Several of my readers discovered quality problems with their product AFTER the product was delivered. In these cases the problems were not discovered until after arriving in the US. In most cases, it’s not economical to ship the product BACK TO CHINA. It will be very expensive and it will take a lot of time. Some were able to negotiate free replacements from the supplier however this still takes a lot of work (back and forth emails) as well as a significant amount of time for the replacements to be manufactured and shipped.
Quality control and product inspection can significantly reduce your sourcing costs and save a lot of time. I won’t bore you with jargon such as “Six-sigma total quality management systems” used by sourcing professionals but the 80/20 of it is this. Amazon and eBay sellers can takeaway these two points:
a) Monitor quality during the production process to catch problems early and fix them: You don’t have to physically be at the factory to monitor quality. One simple way to do this is to request photos of the production process to monitor any problems and catch them early. For example one of our products had a black buckle. We asked the supplier to send photos of the product during production and we saw that the supplier mistakenly used a silver buckle instead! Fortunately we caught this problem early and had them fixed it before bigger and more costly mistakes happened.
b) “Pre-shipment inspections”: I’m surprised that most Amazon and eBay sellers DON’T inspect their products before shipment. I always feel it’s better to inspect the product BEFORE they leave factory than after landing in the destination country. Obviously it’s much easier and faster for the supplier to fix the problem on-site then having to go back and forth over-seas. Second, if you’re stuck with defective products in the US, you’re not likely to send it back to China. It’s way too cost-prohibitive to ship by air and too time-consuming to ship by sea. I haven’t even mentioned the import duty costs and customs declarations bureaucracy that you have to go through either. Third, even if the suppliers agrees to replace them its going to take forever for them to arrive (production, shipping, customs) and think about the sales you have lost during this time.
If you’re thinking what if the supplier won’t fix the problem after inspection? Well if you’ve negotiated payment terms properly to pay the 70% or 100% balance after inspection (see above) then the supplier is motivated to fix them problem… or else you’re not going to pay! This is leverage.
3rd party inspection agencies are fairly common and cost roughly $310 per “man-day” of work as of now. Normally one day of work is enough to get the job done for small/medium sized shipments. I consider this a cost of doing business and an insurance policy against bigger problems down the line.
If this is cost-prohibitive, I recommend you ask the factory to make a “self-inspection report”. This includes photos of the product, instruction manual, packaging, measurements, and anything else important. It’s not ideal but better than flying blind.
5) Consider “going out” of China
China is not as cheap as before with rapidly increasing labor costs. Did you know that factory workers command up to a 15% raise every year?! In fact many factory owners tell me it’s a “struggle” to attract and keep good workers. Just like in the west, Chinese “millennials” are the “me-generation”. They are not willing to work as hard as their parents did for so little. At the same time, China’s macroeconomic policies are pushing China to be a more service-based economy. In other words the government doesn’t want China to be the world’s “cheap” factory forever. Take a look at how China’s monthly wages compare to other countries. China isn’t as cheap as you thought!
What does this mean? Many large companies such as Nike, H&M, and Apple have already begun to shift their sourcing away from China to countries such as Vietnam, Thailand, and India to take advantage of lower costs. It’s important to note they are mostly sourcing simpler products lower on the “value chain” such as apparel, fashion accessories, footwear, and basic electronics.
Nowadays, large multinational corporations often implement a “China +1” strategy where they don’t put all their eggs in one basket. They may source certain products from China and others from suppliers in countries such as Vietnam. This diversifies their supply chain and reduces the risk of “putting all your eggs in one basket”. Smart importers do this as well to not only enjoy cost savings, but also reduce the disruption caused by Chinese New Year factory closures by shifting their sourcing to other countries during this period.
Where do you find these suppliers? For online searches, besides Alibaba, Global Sources has numerous listings of manufacturers from countries besides China.
Looking offline, trade shows are great way to meet legitimate suppliers not from China. You don’t even have to travel far as there are many regional trade shows in your home country that may target your product category. For example there are trade shows in Florida targeting pet products, the MAGIC and WWIN fashion trade shows in Las Vegas, and numerous others taking place locally.
Keep in mind that not all products can be found for a lower price outside of China. But it’s worth giving them a shot to reduce your sourcing costs as Chinese costs rise year on year.
Bonus 6) The 80/20 Rule: time savings = cost savings
Many Amazon sellers find that sourcing can be a time-consuming process. So besides cutting costs, saving time can be the biggest win for your business. You may have heard about the 80/20 rule or Pareto’s principle: “The Law of the Essential Few and the Trivial Many”. 80% of your results come from 20% of your work. 80% of your sales come from 20% of your products. The same rule can be applied to sourcing.