If Supply Cycle is Long, How to Control the Risk of Quotation? Leave a comment

Case

A long-term cooperative customer makes an inquiry to us. The supply cycle of this inquiry is very long, a total of 12 months, a monthly shipment. Recently, material prices have risen, and exchange rates have changed. In this way, what problems should be paid attention to in the quotation of long-term supply, and how to control the risk?

Analysis

The quotation of long-term supply is really difficult. The variables that the seller faces are:

  • The RMB exchange rate is now climbing, but not much. Even so, in 12 months, the exchange rate will change a lot.
  • We can’t predict whether the export tax rebate rate will be adjusted within a year. Perhaps the state will reduce the export tax rebate rate for some products, especially some high energy consumption, high pollution, resource products. Generally, on January 1 of each year, the customs tax will be adjusted, and there will be some changes in the tax rebate rate. Sometimes the country may even suddenly adjust the export tax rebate as needed at a certain time. Some goods do not have export tax rebates but impose export taxes. In the long run, the export tax rebate rate is a downward trend. But for some products, the rate has a trend towards increasing.
  • Changes in material prices cause cost changes and price changes in the product itself. In the past year or two, prices seem to fall rarely. The probability of price increase is relatively large, and the labor cost is also rising sharply.

The above factors will affect the cost of the product. Exporters need to take these factors into account in the quotations.

Suggestion

The quotation is too high for customers to accept, or too low for the company to make no profit. Therefore, it is necessary to establish a reasonable price adjustment mechanism acceptable to both parties. The following are the quotations of long-term supply contracts that I have learned or discussed.

Tips 1

In 2004-2005, the price of the scrap steel was fluctuating. And the price of some products using scrap steel as a material varied greatly. I also had an annual order quotation. Then, I dealt with it in this way: established an arithmetic relationship between product price and raw material price. The main raw material of the product was scrap steel. For example, scrap steel rose and fell within 5%, and the price was not adjusted. If it exceeded 5%, the scrap would fall by 200 yuan, and the finished product price would fall by 100 yuan, which was equivalent to bear 50% of the risk of the raw material rise and fall.

Why do we say that it is ups and downs? If the material price falls a lot, the customer will negotiate with you. The key is how the seller will digest the cost of the rise when it goes up. The price of this change needs a reference. For example, you can use the East China steel market price of 20th a month as the basis for both sides of the calculation.

You can adjust the price according to the change of material price. In this contract, several batches of goods have been adjusted according to the actual situation.

Tips 2

There was a contract that required a continuous supply of one year at the time of signing. Because the shipping price fluctuated greatly, I had additional conditions when accepting the order. During the contract, I would strictly execute the contract when the sea freight of each box was below a certain amount. But once the increase rate exceeded 30%, I would ask for an adjustment to let the buyer compensate me for the freight. For example, the buyer bore 75% of the increase to make up for some of my losses. However, the freight did not rise so high, and the price remained unchanged until the end of the implementation.

You can also refer to the above method. If the cost or freight, or the international market price of your product changes to a certain extent, you have the right to adjust the price. Of course, the adjusted price needs to be reconfirmed, or the adjusted rate should be determined when quoting. Changes in export tax rebate rates and exchange rates can also be put into the price adjustment mechanism. For example, if the rate changes within 2% of the contract period, the sales price will not change. If the adjustment exceeds 2%, the impact on the price will be borne by both buyers and sellers.

Tips 3

It is a good idea to pay the advance payment. Generally, if the contract cycle is particularly long, it is reasonable to require advance payment. Considering the affordability of the other party, I think 20% to 30% is more appropriate. If the buyer does not accept it, you consider other options. After receiving the advance payment, some factories use it to purchase the raw materials of the contract. This prevents unexpected risks and large fluctuations in raw material prices, and can also reduce exchange rate risk.

Tips 4

Profit margin is a problem that needs to be carefully considered. If such a long cycle of contracts with a low profit, the risk is still relatively large. If the contract execution period is half to 2/3 of the time is profitable, it is okay if the individual batch loses a little at the last time. But overall, it is still necessary to remain profitable.

Tips 5

If you are worried that the RMB exchange rate fluctuates too much, you can use RMB price to calculate the contract amount but pay with foreign exchange. When the customer pays, the actual exchange rate is used to calculate the amount of foreign exchange payment to ensure that the total amount of RMB remains unchanged. In this way, the seller controls the exchange rate risk.

Conclusion

You can make some price adjustments on the basic quotation. It’s better to establish a mechanism for rising and falling. Consider not only your interests but also the interests of your customers. For example, when international prices fall, you also offer to reduce prices. In this way, he will be willing to cooperate with you.

To sign a long-term supply contract, you must choose a trustworthy buyer. Otherwise, the risk is great. Of course, this is not an issue of quotation skills. It belongs to the category of strategy.

 

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