How cutting costs can actually cost you more.

We work with a client whose buyer chronically asks for us to lower their costs.  Every order, every item, every time, multiple requests.  It’s their MO.  It’s like they were taught in MBA school that “if you don’t try to cut the price, you never now what you can save.”  And while I agree with the logic, pushing it so often, as they have, means that their costs are actually rising.  Specifically:

1. Factories quote higher original prices.  It is actually expected that you will cut prices to a certain degree, but once you are a “known quality” any additional cuts will cost you somewhere else.
2. Factories pursue conscious quality fade to save money. If you’re intent on cutting the prices up front (especially on first orders) you’ll get bitten in the end, guaranteed.
3. Even if you do cut the cost, to be safe from quality fade you have compensate on your own too.  Meaning, other costs go up, namely any 3^rd party testing, QC or management company involved to deal with issues 1 & 2).
4. Replacements/failures rise when standards are high but costs of materials are not raised accordingly.
5. Inflation and rising RMB are two additional factors that change the costs before ever even getting to the factory.  If you wont’ allow your factory to compensate for these real increases in the PO your quality will take the hit to cover the costs.
6. Overly-strict QC standards.  I know, I can’t believe I’m saying this either.  But if you push too hard on the first order, re-orders prices will go up accordingly.  More time, more re-do/repairs, more labor, more rejects all cost the factory money on the first order and they’ll “learn” what you really cost them before they let you place a second order.  Stick to your QC guns, but don’t be punitive.

I realize that there is very fine line to be drawn here between getting charged too much, getting lower quality, maintaining your standards and allowing for the real changes in prices and expenses.I also understand that many of these issues will exist when working with suppliers regardless of if you’ve pushed too hard on price points or not.So, what to do?First, learn your market.  Know the prices of labor and materials, inflation rates, the status of currency rates.  If you know as much or more than your supplier you’ll never get taken advantage on prices.Second, schedule and enforce purchase and production dates.  If you know what market rates and prices are, and you know what your schedule is supposed to be you can enforce the purchase of materials and the amount of time that is (supposedly) spent on your product according to the dates/qtty’s you were given in your contract.Third, accept real increases.  Since you know the market, you can agree with legitimate increases.  This not only avoids fights but also builds trust—your supplier knows they can come to you with hones issues and you’ll be accepting/understanding about them.Fourth, QC and test your guts out.  Even though you know the prices of the goods your getting and you’re on-top of all that’s going on in the market, that doesn’t mean that you’ll not get ripped off via (intentional) quality fade.  There is nothing else that protects your investment like regular QC and product testing.