Dealing with buyer pressure: know the law, and make a stand

Clare Goldsberry wrote an interesting article on what happens when buyers put so much pressure on their Tier 1 suppliers that they end up in a price fixing investigation with the Feds. This is usually simply about money.

But first, a short lesson in contract law. You get an RFQ, and you quote the job. The result is one of three basic purchase orders.

• SPOT BUY - this is a one-time order. The kind a contractor would make with a lumber yard when ordering materials to build your deck.
• CONTINUING ORDER - this is an ongoing order. Actually this is the type of contract you sign with the phone or utility company. You will be billed a fixed amount for a fixed usage without any additional paper work, your payment changes as a function of use.
• ORDER TO ORDER - This is the most common type in Injection Molding. The PO is really only a framework that establishes lot sizes and perhaps annual volumes to lay the foundation of pricing. However there is no guarantee of any business. The customer orders any acceptable lot volume based on this order whenever he wishes. In order to service this contract, somewhere you have agreed to produce parts 'to specification'.

Contract law simply states that if the terms of the contract are not complied with, the contract is broken. This is described as the contract has been breeched (the entire contract, nor just one section). But, if both parties agree to continue; it is mutually agreed 'by actions' that a new standard is acceptable for all future transactions.

Almost all contracts for plastic parts are breeched with the first shipment because it is practically impossible to completely produce parts 'to print' (meaning every dimension on the print, to the exact color, free of defects, etc). However the parts are shipped, and accepted.

And then THE FUN BEGINS.

Buyers take seminars, read books and from many other sources learn about the ins and outs of contracts. Molders are lucky to mildly tolerate their lawyers talking to them. The game is already stacked against the molder.

For a molder there are a few simple facts you need to keep in mind.

• If you agreed to a price of $75/1000 parts you are under no obligation to change it.
• If your price is based on a material price (a cost you cannot control) with an 'adjustment' clause in it, you are under no obligation to ship parts made of the more expensive material until the price has been adjusted.

This list is endless.

So how do you deal with a buyer who is constantly pounding on the desk for lower costs, higher quality, delaying payment etc.?

First you need to understand why you got the job in the first place:

You probably weren't the low bidder (although he told you if you dropped the price by 1% you would be, and he proved it when you dropped your price and he gave you the job - even though the real low bidder was probably 10% below your quote). You just got Played.

You got the job because the buyer knew you could deliver on his schedule (and frankly he'd do it for any price although he won't tell you that). Again you got Played.

You were chosen because (despite all the yelling and bluffing) there aren't "a dozen guys like you out there who can do it better and cheaper". Yes, there are dozens who say they can; but if it were true, he wouldn't be talking to you. Played again.

Now you need to understand who has the "POWER".

As a tier 1 supplier, you jumped through hoops and filled out a ton of paperwork taking more than six months to simply be approved. Then you were given the 'table scraps' jobs to prove yourself for two years. This means anybody who is your peer took 3 years 'just to get on the list'.

Newsflash - it doesn't take much of an IQ to understand there aren't too many options open to the buyer. It takes too much work to bring a new source on board when you tell him, you no longer want him as a customer.

Since you didn't agree to any 'policy'; every time you're told "It is our policy to pay N-120" although the PO says N-30, there's no reason for becoming your customer's personal bank offering an interest free loan.

Ever wonder why when you agree to a price reduction it is immediate? But when you want a price increase you get "we only renegotiate increases annually"? OR, When the QC people find 10 admittedly bad parts in a lot of 10,000 why did you agree to immediately accept the entire shipment returned and you hand sort everything to replace the order immediately? You agree to this because you've been told "This is our policy".

What you've missed is: what is your Policy? If it is 'the customer is always right', he'll bleed you to death. And you've been running your business believing everyone is fair, honest and willing to help you - while a beautiful fantasy it isn't close to the real world.

But what do you do when you train your dog? You show him 'the program' (yours). Sometimes you have to show him the stick before you throw it until he learns. Sometimes you have to swat him with a newspaper for him to understand your disappointment for bad behavior until he learns. And sometimes if 'that dog won't hunt' you give the dog away or have it put down because the dog is a waste of your time and effort because he can't/won't learn.

When a buyer gives you 'his' policy (the way any untrained dog will), you should explain your policy. Here are a few examples:

THE REJECTED LOT

EXPLANATION- bad parts in small percentages are normal in manufacturing (even the medical industry's use of the AQL system is measuring the 'acceptable level of defectives'). Bad parts are normal and should be replaced or credited. As a molder, perfect parts (in high volume and low cost) are statistics game you can't win. But if the entire lot is bad, something's wrong and needs to be corrected. The defect needs to be explored, found, the cause both removed and verified, and then production can resume. (If you've been silly enough to hire an ISO consultant to do your paperwork in the Quest for Certification this already is part of your documentation.)

YOUR POLICY - the occasional bad part (which is normal) can be replaced, credit to the amount you've over-shipped and not billed, or simply tossed out. No harm, no foul. A bad lot (meaning some kind of a system breakdown) will mandate a minimum of a four week shutdown where no parts will be shipped to the customer until the problem is both understood and resolved.

OUTCOME - since most customers have their JIT systems counted in days, shutting off production for four weeks will have the buyer give long and hard consideration before he'll reject the entire lot.

PRICE NEGOTIATIONS

EXPLANATION - when the part is quoted, it is at a price where both the buyer and seller agree whether it is a fixed price for the term of the contract or a formula based on the value added from the molder plus the fair market cost of the purchased components.

YOUR POLICY - Price negotiations go both ways. You will only ship goods when the price has been agreed to. All current shipments will be stopped and on a day for day drift until the negotiations are completed. If the buyer will consider your price increase in three months, then you'll begin shipping again in three months when it is approved.

OUTCOME - the buyer can change pricing anytime he wants. While it is to his advantage to keep his costs low, driving you into bankruptcy or having your subcontractors refuse to ship components because you and they haven't been paid, is in no one's long term interest. Explain it to him the first time he stalls, cut him off the second time.

THREATS/TASKS/AUDITS

EXPLANATION -Why do you even listen to someone who is doing business with you; threaten to go elsewhere? (If your spouse threatened you that way, how long did it take before you knew the divorce was coming soon?) Why is it in your best interest to lower your costs some mandated percentage demanded by your customer with no financial incentive to help you implement these changes? Why would you let your customer tell you 'you're making too much profit!' or sneak in and tell you that you'd improved your yields or cycle times and he demands a price reduction? This really comes down to how many times would you let your dog bite you before you did something about this bad behavior?

YOUR POLICY - Don't do tasks without funding from your customer. How you make your profit is your business and not open to discussion. There are several shops that will only let buyers/engineers into the front lobby or someone's office. They are barred (by policy or 'for insurance reasons') from seeing actual production.

Threats are easy to deal with: tell the person who threatens you (for any reason) he gets the first time for free. The second threat you perceive (he doesn't have to even come out and overtly do it); you'll stop production immediately and he can take his business (that particular job) elsewhere - immediately.

OUTCOME - people submit to threats and intimidation pressures voluntarily. Power is given, not taken. All you have to do is play whatever game you initially agreed to without exception. All the stuff the buyer says is Bluffing. If you can spot it when you play Poker with your friends, you should be able to spot it at your business.

How do you do this? Simple: Ideally you publish a 'policy manual' of your own clearly stating how you will do business. Attach it to every quote you submit. Attach a signature page and have it signed and returned before you begin business. In the real world however, it is best to state in writing the policy describing the terms of termination of a job and who pays for what. Have your attorney look at it to include full payment for work in process, raw materials and finished goods before you give up the tools. While the buyer will routinely sign and ignore it, this will stop him from filing a Business Interruption action where he takes the tools and you no longer have any leverage.

The conclusion to this little rant is that it is neither a privilege nor a burden to do business with anyone. No customer is more important than another unless he owns an equity position in your company. It is as simple as "I no longer wish to do business with you; it isn't fun anymore". This is particularly effective in an Order to Order contract. You fulfill the particular order you've agreed to and then stop.

Your Policy can be as verbal as the buyer's. The less you write, the less they can hang you with. All you're doing is leveling the playing field. With the field tilted to one player's advantage there's always trouble.

Business should be fun, exciting and profitable with a minimum of drama. If you want drama in your life, raise teenage girls.