When raw material prices go down, can I expect lower pricing on finished products?

Full Question Since the price of Oil has dropped by 50% and since I purchase bags made from Polypropylene, shouldn't the factories reduce the cost of my finished products too? I'm getting different stories from different factories and I need to know how to proceed as my customers are asking for sharper prices now and I don't want to lose my customers or miss the boat with new customers because of prices. What is your take on this?

Answer In the case of your plastic bags, the price of the BOM (bill of material) has a large impact on the price of finished goods as there is not a lot of labor or overheads being built into the final price for this particular product. But if you were buying a product where the ratio of labor cost : BOM cost was different, then the price of Oil would not have as big an impact.

Suppliers are always quick to mention when raw material pricing goes up; but when it goes down, they find every excuse not to pass on the savings.

In my experience, the best leverage is to know the going market rate of a given finished product and use that knowledge to negotiate with current suppliers. In the middle of this video, I offer some tips on getting quotes (RFQ) and on negotiations.

You could spend the time to do the research on the BOM pricing in China, but unless your orders are very large, it saves time and energy to keep a pulse on the going price in China for the finished product and use that leverage in your negotiations, rather than trying to convince the supplier what is the BOM price they should be paying.

Hope the information above helps. Let me know how things work out for you.