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Do Not Focus on the FOB Price When Importing From China

Strategy

I often tell importers not to focus too much on the factory-gate price when selecting a supplier. There are so many other elements to take into account!

Do Not Focus on the FOB Price When Importing From China image DO NOT THINK PRICE 300x300

Recently I had the chance to attend a presentation (in a FCCIHK seminar) that emphasized this point. The speaker was Michael Mayringer, director of global supply chain, Bombardier Recreational Products (BRP), Powertrain division.

His company’s changes in purchasing strategy nicely illustrate three levels of sophistication:

Level 1: Re-active purchasing price analysis

Until about 10 years ago, BRP’s “cost reduction programs” were mainly:

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  • Tactical “price negotiation”
  • Very much focused on labor cost

This is the way most SMEs still interact with their suppliers.

Level 2: Focus on cost, not just price

In 2001, BRP decided to optimize the material cost of its products in a more structured manner. They started to focus on cost instead of price.

They introduced cost analysis methods:

  • Purchasing Price Analysis
  • Value Analysis & Re-design
  • Cost Process Validation at Supplier

They worked on establishing trust and openness with their suppliers. The objective was open book cost break downs. (Note that BRP is a rather large company, and that it might be very difficult for an SME to achieve the same objective).

These activities proved to be successful for a few years, but the returns were clearly diminishing. So BRP took a more pro-active approach.

Level 3: Pro-active enterprise costing

They asked themselves this question:

“Can we implement a holistic business process (Enterprise Costing) capturing the entire product lifecycle and involving the whole value chain as a sustainable strategy?”

They had four objectives:

  • Develop better cost-calculation processes, know-how, transparency, and management.
  • Heavily focus on costs during the product development phase.
  • Better align their technology, manufacturing, and sourcing strategies.
  • Involve supply chain partners more early and more effectively.

Here is how they illustrate this new approach:

Do Not Focus on the FOB Price When Importing From China image costing for FOB

This approach is based on several elements:

a. Maximum value proposition

  • Intensive early supplier involvement in product development
  • Rigorous application of “design to quality & cost”
  • Search for improved customer satisfaction

b. New form of organization

  • Cross-functional approach (horizontal based on type of product, not vertical based on functions).

c. Integrated part of global sourcing strategy and supplier management

  • The most cooperative suppliers were moved up to the level of strategic supplier or even alliance partner.

d. Innovation

This third level is clearly a big step toward best practices. Can SMEs not get a lot of inspiration from this example?


By Renaud Anjoran, founder of Sofeast Quality Control that helps importers to improve and secure their product quality in China. He writes advice for importers on the Quality Inspection blog. He lives full time in Shenzhen, China. You can contact him at info@sofeast.com

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