4 Ways to Combat China Price Increases without Raising Prices to your Customer

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.