There are two basic strategies to negotiate garment price in Vietnam. One is to negotiate each price component; the second is to negotiate the total price only. In either case you need to have a reference price to have more leverage. In this post about how to negotiate garment price in Vietnam, I will discuss the following concepts:
CMT vs FOB Price
Best Negotiation Strategy
Will you negotiate a CMT or FOB Price?
A CMT factory is basically only selling labor. Buying on CMT terms means that you have to supply all the fabric, trim, accessories and their transportation. For example, if you have a cheap source of fabric in China and you want the Vietnamese sewing factory to receive the fabric and only do the sewing, then you ask for a CMT price. In this case, you pay the Chinese fabric-factory for the fabric and you arrange for (and pay for) the fabric to be delivered to the Vietnamese sewing factory.
You must understand FOB, sometimes referred to as “Full Package”, and CMT when learning how to negotiate price in Vietnam.
Note that from Vietnam’s perspective the price only includes manufacturing, not shipping or import duties.
Whose cost breakdown sheet will you use?
In fact there are many variations of cost-breakdown-spreadsheets. Each factory has their own flavor. You can accept their costing methods and translate it to your standard or you can force them to do it your way. I recommend you follow their methods. If you try to super-impose your way of breaking down the cost, you risk frustrating them. Unless you are a big player, it is best not to frustrate them. In my opinion, the cost breakdown should be broken into these categories:
• Management Fee
Best Negotiation Strategy
My advice is to give them the tech pack with order quantities and let them offer price first. Don’t give your target price. Ask them to break the price down as much as possible but don’t insist if they resist. At this point, give another factory the exact same tech pack and order quantities. If the prices are the same then you can feel comfortable that you are getting a fair market price. Getting a third price quote is even better. If the price comparison shows big differences, then show each factory and ask them why the competitor is offering a better price. Listen to their answers and gauge if they are being honest or trying to confuse you like a goat on Astro turf. Trust your gut. Finally, tell them your target price is .25 cents lower and ask what they can do to lower the cost. Ask them to suggest things like using used thread, different printing techniques, cheaper trims, no print on the polybags, or a cheaper fabric, etc. They might come up with some good ideas you did not know about that can help reduce the price without compromising the quality. This is how to negotiate garment price in Vietnam.
Sometimes you can offer flexible delivery times to get a reduction in price. Often factories have slow seasons where they are desperate for orders. If you help them fill their gaps in production they appreciate it and will somehow do something nice for you in return. The key is to first ask for an aggressive delivery time and wait for them to tap-dance about not having capacity. Ask to see their production timeline projection. If you see small pockets of availability, then hesitantly, you can suggest to move your production to fill their empty production lines. If they say yes, then ask for a favor in return. Most likely they will not give you a significant discount but you can try this tactic to get some leverage.
Payment terms is an important point in how to negotiate garment price in Vietnam. Payment term options are cash, bank transfer (TT), or letter of credit (L/C). Cash is rare. International bank transfers are the most common and cheapest payment method. Letter of credit is the safest but most expensive.
A letter of credit is a guarantee from a bank that the factory will receive your payment. In return for guaranteeing the payment, the bank will require that both parties live up to agreed terms like sample approval deadlines, on-time delivery and successful quality inspections. The bank will need to receive certain documents before releasing payments – for example shipping confirmation and a quality control report. The banks charge a fee for this guarantee that will eat into your profits. Most factories prefer TT payment terms to avoid the extra paper work and avoid bankers.
In Conclusion: Trial and error is the best way to learn how to negotiate payment terms in Vietnam. After doing it a few times you will find your groove and get better and better pricing.