Evidence from Fashion Products Exhibition
In April 2015, I had the chance to supervise interviews of over 1000 suppliers attending the Global Sources electronics and household goods trade shows in Hong Kong. The Questions focused on what is your number one challenge and how are you responding to it. We all have ideas of the challenges facing suppliers in China, whether it be costs, labor turnover, materials costs, uncertainty about government regulation, the need for skills to support homegrown innovation, etc. However, what we want to understand is how suppliers are responding to various challenges and what are the factors that make suppliers respond to the same challenge differently.
Understanding the supplier’s challenges can help you improve your negotiation outcome as you bring to the table suggestions that can improve the supplier’s operations, marketing and innovation strategy.
Number one challenge faced by suppliers
April 2015, 97 Chinese suppliers were interviewed at the Fashion Accessories China Sourcing Fair (n=78) as well as the Gifts Products China Sourcing Fair (n=19). The suppliers provide products including accessories, underwear and swimwear, gifts and kitchenware. The top 3 challenges for Chinese suppliers are Competition, Cost Control and Sale Growth. I find that the suppliers’ challenges depend on the nature of their products, for fashion products, their biggest challenge is competition. However, that is labor cost control for the gifts products.
Responses by suppliers
In response to competition (26%), R&D (8), quality control (5) and reducing production cost through scale economies (5) were the main responses. In response to cost control (21%), automation (3) and market expand (2), R&D (2) were the main responses. In response to sales growth (11 %), attend expos (4) and find new markets (4) were the main responses.
Challenges faced by different groups of suppliers
I next divided the suppliers according to the type of product (fashion products and suppliers of gifts products). As for fashion products, market competition, and cost control was the most and second most frequently cited challenges faced by the suppliers, whereas, for gifts products, were labor cost control and Market development. Differences also existed with respect to a) the third challenge commonly cited by suppliers, and, b) how the suppliers responded to these challenges.
The main challenges faced by suppliers of different products are as follows. Of the 78 suppliers of fashion products, 31% cited market competition, 14% cited cost control, and 11% cited sales growth as their largest challenge. Of the 19 suppliers of gifts products, 37% cited labor cost control, 11% cited market development, and 11% cited the macro economy as their largest challenge.
The challenge for fashion suppliers is market competition from international fashion brands who are executing with fast product design cycles (some lower than 40 days from concept to final sample) and smaller volumes as more frequent updates are made to the various product groupings. Hence, fashion suppliers are facing great cost pressure as the volumes needed to absorb the fixed set up, tooling and factory costs are smaller than in the past, making the cost per unit higher.
The analysis of the data shows that suppliers are facing market competition and cost control challenges. However, they are responding to these challenges differently depending on the size of the suppliers, the type of customers or type of product produced.
Action points for the buyer
Understanding the challenges faced by suppliers is the first step in having real negotiations with them.
1. Does the supplier have a sustainable business?
At the outset, understanding their main challenge and how they are responding to this challenge can help you to decide whether you want to do business with them or not. In order words, does the supplier have a focus on current operational problems or longer term strategic opportunities? Will the suppliers be around in 6-12 months’ time?
2. How far in advance will you know before an impending problem will arise?
After you decide to do business with a supplier, understanding their major challenge faced can help in developing a relationship that goes beyond the written contract. Given that the written contract is the last resort when things go sour, having a developing relationship is critical in case the respective parties objectives diverge over time. Knowing the challenge of the suppliers can help win the suppliers trust and at the same time provide signals for impending problems that might arise.
3. How can you provide value to the supplier that is beyond the exchange of goods price?
In essence, knowing your suppliers major challenge can provide the buyer with an opportunity to help the suppliers, beyond the monetary value of the exchange of goods in the contract. In other words, through focusing the negotiations on the suppliers challenge, buyers are able to create a feeling of empathy in the mind of the supplier, and ultimately create value for the supplier that is greater than the price of the contract.