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If you sell to a Japanese company
You sent a quotation to your customer. What came back was not a demand for a lower price. It was a form. Material cost, processing cost, overhead, profit. Fill in each line and send it again.
You search in English. What you find is general project management writing, or cost breakdown articles from another industry. Nothing is written from your side of the table, about why a Japanese customer sends a cost breakdown request.
There is already good writing in English about Japanese business culture. This is not that. This is about money.
I have spent twenty years buying for a large Japanese manufacturer. I have been on the side that sends the form.
- You received a cost breakdown request instead of a price negotiation
- You cannot find an answer written for your side of the table
- You are not sure why the form arrived at all
- Why the request is not really about your price
- What to ask back, and when you will get an answer
Yes, they will be able to see your margin
Sending a cost breakdown makes your margin visible to your customer. That is true, and the person asking for it knows that. There is no point in softening it.
You were probably given a reason. To bring the cost down together. To build a long relationship.
In practice, that reason is half true. What you send really does become material for bringing the cost down together. It also becomes material for pushing your price down. I write that as someone who sits on the buying side.
So the discomfort you feel is correct. This article is not trying to talk you out of it. It is about what to do next while you keep it.
The price was decided before you quoted
Japanese manufacturers use a way of setting prices called target costing. The order runs like this. First they fix what the finished product will sell for in the market. Then they subtract the profit the company wants to keep. What is left is all the cost that product is allowed to carry. That amount is then divided across the parts. Each share is a target cost.
So by the time someone asked you to quote, what your part should cost was already decided. Nobody is working it out after reading your number.
Target costing runs in the opposite direction from the way you build a price. You add up material, processing and overhead, then put your profit on top. You build upward. Target costing starts at the market price and subtracts. It comes downward.
- Material cost
- Processing cost
- Overhead
- Your profit
- The price you quote
- What the finished product sells for
- Minus the profit the company keeps
- What is left is the cost the product can carry
- Your part’s share of it, the target cost
In practice, a buyer is not looking at whether your price is high or low. How far is it from the target cost. Where does that distance come from. That is what they are looking at.
A total does not show where that distance comes from. The way material is taken from the stock size. The way the process steps are arranged. The way overhead is loaded. None of it shows unless the number is separated out.
So a cost breakdown request is not an idea someone had after reading your quotation. The work of finding that distance started when the target cost was divided across the parts. The form that reached you is the next step in that same work.
Ask what your number is being compared against
Once you know this, three things follow.
First. When you send the breakdown, you are allowed to ask back. What will this breakdown be used for. What is my number compared against. What is the target price. In practice, a supplier who asks does not look better or worse to the buyer. There is nothing to lose by asking.
Second. Do not expect an answer the first time. A buyer does not give a target price to a supplier they do not know yet. If they do, what comes back is a quotation that sits exactly on that number. The answer starts to come later, once you have a record of not inflating your prices. Even then it is usually not an exact figure, only a rough direction. Do not read a first refusal as a rejection.
Third. When you are asked to explain your price, the buyer is asking where the basis for that price comes from. Answer with what each line is built on, and the number of rounds goes down.
The request exists because your customer wants to know whether your price is reasonable. Reasonable against the target cost they already set, and against what other suppliers charge. If it is not, they want to know which part causes that. Japanese companies are uncomfortable being out of line with everyone else, and that shows up in how they buy.
Learning the angle of a bow, or how to hand over a business card, will not make this request go away. What reduces how often you are asked to explain is trading over time, until the buyer understands how your company builds a quotation.
This article did not cover what your numbers become inside the buyer’s company, or how much of your quotation detail to disclose. Both get their own article. The yearly price reduction Japanese customers ask for, called annual cost reduction, is a different thing again, and is covered separately.
What I could not check.
I could not check how many Japanese manufacturers use target costing today. The academic work that describes it is from the 1990s. I have not found a recent count, and I am not going to invent one. What I can tell you is that it is how the buyers I have worked with set a price.
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