Best China Sourcing company
That Drives Profit Growth
Increasing competition, price wars, and maintaining market share have forced companies to reduce costs. The most direct way to reduce costs is to lower prices with suppliers, but it is not easy for suppliers to lower prices. So, how do buyers persuade suppliers to cut prices? Here are some good reasons:
The annual compound annual growth rate of manufacturing output is continuously increasing, and the production efficiency is increasing regardless of whether it is calculated by unit hour or unit labor output. And the growth has a tendency to accelerate. The reason given by the purchaser is that the supplier cannot monopolize the resulting profit growth, and the corresponding benefits should be transferred along the supply chain to the end customer.
The production price index of many products, such as personal computers, semiconductor chips, and home appliances, has fallen year by year. The purchaser has reason to share. Similarly, changes in the Consumer Price Index (CPI) will also affect purchase prices.
If the above two reasons are macroscopic and may not be fully applicable to a specific supplier, then the supplier’s use of specific new processes, new equipment, lean production, etc. will bring direct results, and the corresponding benefits should be transfer to the buyer. Buyers can also relax some regulatory requirements, improve designs, etc, so that suppliers can reduce production costs. This often requires the buyer to invest in design, re-qualification, and take risks.
When the product was first put into production, the production efficiency was low, and the management and engineering expenses were also high. When the product enters the maturity period, practice makes perfect, and employee efficiency will be higher, and the corresponding savings should be partly transferred to the buyer. This is especially suitable for products with high technical content and complex production processes.
As the buyer’s purchase volume increases, the unit cost should decrease. This is the most convincing in price cut negotiations. The benefit of scale can not only be reflected in a specific product, but also in the total purchase amount.
Prices have fallen year by year, and the corresponding cost pressure has been passed on to the entire supply chain. Everyone has to work together to protect market share. The result is often that everyone increases efficiency or reduces profitability.
When the buyer is dominant, the supplier is required to reduce the price in a coercive manner, without consulting the supplier. This is usually a trick to improve the profitability of the buyer when the buyer is in poor product sales or the competition is fierce, resulting in losses and meager profits. If the supplier lacks the willingness to cooperate, the supplier will be replaced. Of course, such drastic price cuts will destroy the harmonious relationship between supply and demand.
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