Path: Ask the Experts >> 

What are the most appropriate policies to deal with changes in commodities prices?

Posted: 2011-07-05

Full Question

What are the most appropriate policies to deal with changes in commodities prices?

Answer

I realize your question is about how to negotiate who pays for rising raw material pricing with suppliers. However, I would like to add a few comments that the others may enjoy if they are dealing with Chinese suppliers who fail to deliver on time at agreed price and quality (despite having a contract in place,) because the suppliers claim the raw material price has increased and they would lose money if they sell as earlier agreed.

I realized that two things often happen in China:

1.  The costs of raw materials go up and down, so the supplier tries to play the market and buy his raw materials at a lower cost. If the raw materials keep going up, the supplier may decide to break the contract rather than cut his margin or produce at a loss. As a Westerner used to dealing with contracts back home that "mean something", I was totally blown away by this casual attitude in China when I first came here 12 years ago. These days when I place the PO or give a deposit to start the order, I make it real clear to the supplier that I expect him to purchase the raw materials ASAP and I have my team (or 3rd representatives) on site to verify materials have been purchased.
2.  You would think the above step would solve things, but... think again. Even after verifying the materials for my order which were in the factory, now and again, I would get a call at the 11th hour stating the supplier couldn't ship and usually some reason was made up like "power outage", "lack of workers" and the most common fake reason - "equipment or tooling problems". 9 out of 10 times, when I looked into it, I learned that another more important buyer (in the eyes of the factory) twisted the arm of the supplier to use my stock for their order. If you are buying 10,000 neckties and Wal-Mart walks in to your supplier with an order for 1 million, you may find the supplier ready and willing to break the terms of your agreement to make more money from somewhere else. That is why I try to find factories that are an appropriate size where my order will get the respect it deserves. Another tool I use is to build a "goodwill piggy bank". I try to maintain good relations through holiday greetings, frequent visits/ meals and even vacation invitations so that the suppliers get to know me as a good friend rather than just PO #. This goodwill has saved me a few times when my suppliers opted to honor the friendship when the contract alone would not have been persuasive enough.

Tip: It could mean your supplier is not 100% on board the terms of your agreement if your supplier fights reasonable late delivery penalties or refuses to work under a letter of credit.

Have another sourcing question? Submit your question to our sourcing experts.

* Your E-mail address:
(Required, but will not be made public)
* Your Question: