It is important to understand how your customers view you and what kinds of games they can play. It's equally important to know how you'll respond. Bill Tobin of WJT Assoc. talks about these relationships in the first of this two-part article, part of his ongoing series on business relationships of custom molders.
Generally, customers want only one thing: perfect parts, on time, every time, at a reasonable cost. Just like you, your customer is interested in lowering his costs or holding the line against price increases.
Your customers have the opportunity to attend numerous seminars on how to beat up suppliers to lower costs. This is done purely to create a wider margin of profit for them. While they may throw around words like "Partnering," "Primary Supplier," or "Preferred Supplier," there is no loyalty attached to these words any more. The way we did business 20 years ago is dead. A customer relationship should be like a marriage: that is, based on trust with the assumption that it is long term and relatively peaceful. But, like a marriage, when the threat of a breakup is clear or behavior indicates abuse, it might be time to get on with your respective goals separately.
In order to play in this new arena, you need to understand some games your customer may play on you, what the customer's usual response is, and how you might consider responding. Keep in mind that if you are losing money, you are losing money and you cannot make it up in volume. When you go out of business, your customer will pick up his tooling and go somewhere else. It is, therefore, important to keep your profits sound. While it is good to plan for the future, you should not lose money today in an attempt to finance tomorrow.
One of the players in this game is your salesperson. Unfortunately, salespeople are usually horrible negotiators. Their job is to book the order, not negotiate. Another player is the buyer. He, too, is usually a bad negotiator. His job is placing orders and assuring a continuous supply of goods. Different players are necessary to play this game.
Many executives look at purchasing as an administrative function. They do not see the opportunity for lowering their own internal costs. Here is an example. A major computer manufacturer spends 15 percent of its money on internal manufacturing, 10 percent on white collar expenses, and 75 percent on purchasing goods. Twice a year, it looks at streamlining its operation to cut costs. By simply looking at the numbers, it is easy to see that a 5 percent reduction in the cost of purchased goods is equal to a 25 percent drop in manufacturing costs. Managers like those kinds of numbers. Beating up the suppliers becomes an extremely attractive opportunity.
Here are the most common games your customer is probably going to play on you in order to get his costs down. It pays to know the rules and the appropriate strategies.
Material Price Increases
- The Scenario: You go to your customer and inform him that because your resin price has gone up 30 cents/lb, you will be increasing the price of future orders by 2.53 cents/part. By your algebra, you have simply passed the increased cost of the material on to the customer. This should be accompanied by a letter indicating the past and current pricing structure of resin and perhaps a photocopy of an industry publication noting material costs.
- The Response: Your customer weighs the part and determines the percentage increase in price does not match the part weight. He calls you and refuses to accept the increase. In 60 percent of the cases, the molder will back off and lower his profit margin in the name of keeping goodwill and keeping the business.
- Your Counter: Remind your customer that your price includes machine time and material. The material includes regrind, scrap that is thrown out, and purgings. Suggest that the price could be lowered by increased volume. This would be done by linking this particular job with other jobs using the same material. He might consider consolidating vendors by material type. Assure him that if the material price goes down, you will also give him a price reduction. Now is also a great time to talk about making the runners thinner to improve the cycle time and offset the material increase, or burning the parting lines together to get to a minimum wall stock thus saving both material and cycle time.
- Your Last Move: If the price increase is justified and your initial response to his RFQ stated that it was based on a certain material price, you are entitled to the increase. Next time use words like these on your response to the RFQ: "We are pleased to quote $XX.XX per thousand parts based on the specified material cost of $Y.YY/lb. For purposes of changes in resin prices, each part will be considered to have $.ZZZZ of material at the above price." This now gives the buyer fair warning how you'll be adjusting prices when resin prices change. Since he'll usually ignore it as part of the verbiage to your response, this is the ace you'll be holding back. You can point it out only when you have to play it.
Good Guy/Bad Guy
- The Scenario: The buyer's role is to be the good guy. The customer appoints a bad guy: usually the CEO or someone of equal authority, who sets price limits on all purchases. A letter is sent to all suppliers, telling them what the customer is willing to pay.
- The Response: When the salesman objects, the buyer (the good guy) says something to the effect that he can't do anything, but here's what "they'll" pay. This leaves the buyer in a position of only accepting your concession and not negotiating. He also indicates that negotiating beyond the scope of the price limits requires him to put his job on the line and get approval from the CEO.
- Your Counter: Hold firm and don't give a price reduction. Maybe 50 percent of the molders in this game will reduce their prices in accordance with the "limits." For the buyer, most of this is posturing. He usually doesn't need approval if your costs are reasonable and justified.
- Your Last Move: Show how linkage to more business, better engineering, tooling modifications, and new jobs could substantially impact the cost of parts. Don't make the concession to price until you have the new business up and running and you can actually demonstrate the savings.
The 12-Month Price Freeze
- The Scenario: This is a variation of the Good Guy/Bad Guy game above. Your customer arbitrarily announces he will not accept any price increases for the next 12 months regardless of what may or may not be stated in existing contracts. This usually results in 60+ percent of the suppliers agreeing to this larceny.
- The Response: You either cave in or write back and politely decline the freeze.
- Your Counter: In your letter declining to accept the freeze, point out you will do everything within your power to hold the line on prices. However, you cannot hold back those costs you cannot control. Further point out that any productivity improvements that would (or might) have resulted in a price reduction to the customer will now be kept by you to offset the cost increases he has forced you to absorb.
- Your Last Move: Any customer that announces an arbitrary price freeze on purchased goods is doing so for one of two reasons. First, it's a quick grab for some excess profits. More likely, he's telling you he is in financial trouble. This is usually the first sign of a pending bankruptcy. If at the same time his payment history starts to stretch out, put him on C.O.D., and prepare to be a creditor in bankruptcy court.
The 12-Month Price Freeze and an
Additional 3 Percent for 12 Months
- The Scenario: This comes from sheer greed. The customer has gotten most everyone to agree to a price freeze for 12 months. When that is over, a letter is sent to all suppliers demanding another 3 percent drop in the price of purchased goods.
- The Response: 40 percent of the folks who accepted the initial price freeze will also accede to the 3 percent reduction. In this game, it is common for the buyer, when you send in your invoice for the full amount, to take the 3 percent discount anyway and send you another copy of the CEO's letter. This will usually influence an additional 20 percent of suppliers who will give in.
- Your Counter: Hold firm. Cash the initial check. Re-invoice for the lost 3 percent. Hold all further shipments until the account is settled in full and you have assurances all future invoices will be paid in full.
- Your Last Move: If this happens again, put the customer on C.O.D.
When you see these games being played on you, keep your strengths in mind: The molder/customer relationship is like a nine year old taking a fully grown German Shepherd for a walk. Obviously the dog could at anytime overpower the kid. However, whether the dog knows it or not, consistent bad manners are a one-way ticket to doggy heaven or a new, less tolerant home.
Your customers are the dog--they are bigger and stronger, and can (if you let them) push you around. You are the kid. Your advantage is that you don't have to do business with them. With the current popularity of just-in-time manufacturing, it is usually the customer who suffers the dramatic financial loss by having his supply of parts stop--he loses more than you do by losing a customer.