The bad news for molders serving the automotive market: You cannot beat low-cost suppliers on price. The good news: You don’t have to.
You’ve got to shift this focus away from price, because the Chinese, the Indians, they’ll beat us every time,” explains Tony Kotler, managing director of Kotler Marketing Group (Washington, DC). “There’s no way we’re going to get our costs low enough that we can possibly compete, but the purchase price is not what really matters. What really matters is the total cost of doing business—the total cost of the transaction from sourcing all the way through to usage and disposal.”
Kotler’s company has been preaching the importance of “defending your price” to suppliers in a variety of markets, hosting seminars in the healthcare, life sciences, financial services, and aerospace, as well as automotive and commercial vehicle sectors. In all markets, especially automotive where OEMs are the best, or worst, depending on your perspective, at forcing price concessions from suppliers, all good price defenses start with an offensive effort to differentiate your company.
“We don’t care about things where we don’t have an advantage and the competitor has no advantage,” Kotler says. “We focus people right away on the key points of difference and we work through that. What are these key points of difference, and then, how do we quantify what each of these differences is worth in dollars and cents?”
Taken to the woodshed
Steve Rose, automotive and commercial vehicle practice lead at Kotler Marketing Group, says antagonistic negotiations between automotive suppliers and OEMs have, unfortunately, become entrenched. “From [the OEM’s] point of view it makes a lot of sense,” Rose says, “because it’s very easy to squeeze your suppliers and pit these suppliers against one another, force them down on price—that provides you with an immediate savings on your cost of goods. It’s a powerful temptation for these companies because they need results quarter to quarter, and this is the quickest, easiest way to improve their bottom line—just take your suppliers to the woodshed. But over time, it’s just not good business.”
Demanding suppliers open their books, many OEM purchasing departments come to the negotiating table already having a set piece price in mind. “So in the plastics case, if I know who your pellet supplier is, and I know how much you pay per pound of pellets,” Rose explains, “then I know how much the part you make me costs in weight, and I try to come up with some basic economic equation that says per/kg of plastic [processed], this part ought to cost X.”
Given the likelihood that future spikes in resin prices are more, not less, probable, molders will have to gain traction in negotiations if they’re to survive. “[Pricing] is going to be a big issue for injection molders,” Kotler explains. “Now that oil’s gone higher, their costs are going up, and when that happens they’ll struggle with, ‘How do I pass on the higher cost?’
“The majority [of suppliers] continue to be terrified of saying no to purchasing, and they’ve been doing business this way for 20 years,” Kotler continues. “Purchasing has all the power—purchasing says jump and they jump—so this is what they’re used to. Until they break out of this mindset, their own jobs are going to be threatened.”
Breaking the cycle
Kotler’s company has been offering a variation of its “defending your price” program for around 15 years, and over that time, it’s found that companies that successfully implement the tenets it promotes see an average gross profit improvement of 3%-5%. “Gross profit is basically found money,” Kotler says. “It drops straight to your bottom line.” A 3%-5% increase in gross profit can equate to as much as a 10%-20% gain in operating margins, he asserts.
Since they began offering the seminar, Kotler and Rose have seen two primary subsets of suppliers emerge: frequent discounters and price defenders, with the former often taken advantage of by OEMs while the latter enjoy healthy operations. According to Kotler, price defenders, despite requests from the OEM, often do not share their costs, forcing the carmaker to focus on its suppliers’ quality and service. Price defenders and frequent discounters both invest in negotiations training, but the discounters do so much more and with little effect, while the defenders spend more money on training in value-based sales.
In terms of relations with the OEM, discounters’ point-to-point interactions are peer based, engineer to engineer, sales to purchasing, and that’s pretty much it. Defenders, meanwhile, cast a much wider net to “create value in a lot of different places,” according to Rose. “[Defenders] know more people and they call on different departments trying to get the data to quantify what those values mean.” If a supplier comes up with a part finish that fits OEMs’ marketing vision for a vehicle, they make sure the marketing department, and not just purchasing, knows.
A difficult road ahead
In spite of the upheaval in the broader industry, Kotler believes the job losses that many suppliers have experienced over the last few years will not be any different, unless the sales/purchasing dynamic changes. “One prediction that I would make going forward is the U.S., Canada, and Western Europe will all continue to lose jobs and suffer plant closures. That’s the clear trend we see,” Kotler says. “Unless they take action, high-value suppliers in the U.S., Europe, and Canada will continue to see job losses. Now, the good news is these suppliers have a compelling case to make.” Kotler says that in every industry there are typically two types of suppliers: low cost vs. high value (price), and low cost doesn’t have to win. “People, consumers, and businesses make the decision every day to pay more to get more,” Kotler says. —Tony Deligio