Chinese suppliers will not tell you the price secret

By justchinait
December 25, 2020

Reviewing supplier quotations is the most basic job of a buyer. However, many purchasers do not have basic financial knowledge and do not understand the composition of quotations. Just discussing a few price reductions on the basis of the total price does not reflect the professionalism of the buyer. Below we will tell you how to read the supplier’s quotation based on actual combat experience.

The quotation contains the following six parts:

1) Price and consumption of raw materials:

“Raw material costs are related material costs that are directly incurred during the production of a product and that are proportionally changed with the increase or decrease in the output of the product. For example, the raw materials that form the main part of the product, the parts and components that constitute the product entity, etc.

The cost of raw materials often accounts for the main proportion of the price, which may be as high as 50%, which is the focus of procurement review.

2) Labor costs or working hours:

“Labor costs refer to the expenditures of workers directly engaged in production and auxiliary production units that are included in the budget estimates.

Labor cost = daily consumption × daily wage unit price. Including: basic wages of production workers, overtime pay, employee benefits, etc. “

The income of workers in various places is often relatively transparent. In 2019, the monthly salary of workers in the Shenzhen factory is about 4000-5000 yuan. Then, by calculating how many products each worker can complete each month, the labor cost of each product can be calculated.

In some processing companies, suppliers will convert labor costs to hours, which is the concept of labor costs.

However, with the competition and development of the industry, each industry has its own customary working hours, which will include profits.

3) Packaging and transportation costs:

“As the name suggests, it refers to the cost of the supplier packaging the product and shipping the product to the customer’s designated receiving place.”

Generally accounted for 3-8% of the quoted price.

For many purchasers, when reviewing the packaging and transportation costs, it is easy to pass this area because they do not understand the details. Therefore, suppliers like to hide their profits here when quoting.

Buyers should study which material and form of packaging are the most cost-effective to avoid waste.

For transportation, different forms will correspond to different costs and risks.

International logistics companies usually have strict requirements and more expensive freight. Therefore, buyers must understand the supplier’s logistics method while seeing the freight, and make a correct judgment on the price level.

4) Management fee:

“Management fees refer to various expenses incurred by the administrative department of an enterprise for organizing and managing production and operation activities. Including: company expenses, labor union expenses, unemployment insurance, labor insurance, board of directors, consulting fees, litigation fees, business entertainment Expenses, office expenses, travel expenses, postal and telecommunications expenses, greening expenses, management staff salaries and welfare expenses, etc.”

Management fees generally account for 5%-20% of the quoted price, which is difficult to directly judge.

5) Gross profit:

“Gross profit is the balance of commercial enterprise sales income (selling price) minus the original purchase price of the goods. If the gross profit is not enough to compensate for circulation costs and taxes, the enterprise will incur losses.”

The gross profit of Chinese suppliers is usually 20%-30% or more of the selling price.

6) Tax rate

“Value-added tax is a turnover tax levied on the value-added amount generated during the circulation of goods as the tax basis.”

In addition to the above six main points, the purchaser should also master the following five points and grasp the scale.

1) Quotation validity period

Lock the price within the validity period.

2) Minimum order quantity

Too small will cause the price to exceed the budget; too large will cause too much inventory.

3) Delivery

Too short will lead to increased logistics costs; too long to fear that the supply will not be available

4) Warranty period

How to deal with problems during the warranty period.

5) After-sales service

What is the supplier’s response time and problem-solving capabilities?

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