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Molding tricks for higher profits, part 7: Handling the bullies

workplace bully
Buyers attend classes and seminars learning all the tricks they can use to cause a molder to drop an already agreed-upon price on a continuing basis. Here's how to fight back.

Buyers have an interesting problem with molded plastic parts. Plastics are seen by the purchasing department as commodities, something easily purchasable anywhere at a low cost. Commodity buyers worship at the altar of lowering costs and not having to pay for the molder's inventory level. Their pay and bonus are all tied to “supplier management.” They attend classes and seminars learning all the tricks they can use to cause the molder to drop an already agreed-upon price on a continuing basis.

Contract law 101: Please be aware that I am not a lawyer. Before you implement some of these policies, check with your own legal counsel and take a few courses from the Small Business Association.

When we buy something at a store, there are many laws that protect us. However, molds and injection molded parts fall under a different set of laws—specifically the Uniform Commercial Code.

This has to do with the concepts of a professional buyer and seller. Because every commodity in business is usually unique, this allows both buyer and seller to write their own “law” for the transactions. Moral: If it isn't in writing, it doesn't apply (no verbal agreements). Therefore, minimize phone calls and keep things in writing. Most states now accept e-mails and electronic signatures as legally binding contracts, as long as the e-mail contains all the elements required for a valid contract.

To keep confusion down, commercial law also has the concept of a “company agent.” This states that only one person on each side of the transaction has the authority to do business or modify the contract.

There are three rules in commercial law you should keep in mind:

  • The last document to change hands before the actual work begins is considered to be the valid document, encompassing all the terms and conditions. All prior documents and agreements are considered to be invalid.
  • Both agents are required to read their mail in a timely manner.
  • If one party changes the agreement without the written consent of the other, the entire agreement is considered in breach.

The lesson here is obvious but mostly ignored (until something goes wrong). Remember all the almost microfilmed stuff on the back of your customer's RFQ? That isn't junk. It is their policy of doing business with you. Since their legal department wrote it, it is usually very one-sided in the customer's favor.

To counter this, attach and reference on your response your terms of doing business. You, too, can microfilm on the back of your response. Note: When you finally receive the PO, make sure it references your final offer by date and quote number.

Topics you might want to cover:

  • Payment, per your terms. One late payment and no credit will be further extended; COD for the next six months.
  • Rejects: Only five samples should be initially returned along with documentation showing they are measurably different from previously accepted shipment and, indeed, out of specification. Manufacturing and future shipments will cease for six weeks minimum until you find, correct and qualify the part to be free of defects.
  • Deviations: This allows out of spec but useable parts to be temporarily used. Deviations will last no longer than 30 business days and not be extendable until a legitimate engineering change is processed. After 30 days without an ECO, all shipments will cease.
  • Specifications: All products will be molded to commercial tolerances and inspected per the Society of Plastics Industry visual and dimensional standards. Anything else (CpK tolerancing, statistical control charts, etc.) will be considered exceeding common standards and charged accordingly.
  • Discontinuance of business—the procedure to discontinue doing business with each other will be as follows:
    • Notice must be given in writing, and all production will stop immediately.
    • The customer must pay for all material purchased for the job in question, all goods-in-process, finished goods and all outstanding invoices before the mold can be pulled.
    • Any customer owned tools, jigs and fixtures would also be shipped.

Note: There is a common trick corporate lawyers use if this policy isn't in place and agreed to: They say they want the mold. You refuse to give it to them because of outstanding moneys owed. They go to court and get a judgment against you (called a business interruption judgment) which can be equal to three times the money they lost because you caused this interruption in their company. Moral: Get your policy on discontinuing business on every document you exchange. This is kind of a “pre-nup” agreement in the business world. With this in place, they have no case in court.

And here are my favorites:

  • Threats/intimidation: The customer can “threaten” to relocate its business either verbally or in writing. The second time this happens, a letter of discontinuance will be sent and work will cease for that job.
  • The customer has no right to the supplier's financial data or on-site inspections. Financial reports can be obtained from credit reporting agencies.

Do these work? Here is an example: Najas Haster owns a company called Prevent in Bosnia and supplied Volkswagen with seat covers. To lower its supply chain costs, VW started pushing. What VW did not realize was that Mr. Haster is one of the richest men in Bosnia. Rather than bow to VW, Haster simply refused to ship, interrupting production in six European production plans, idling 28,000 VW workers and uncounted numbers of workers at other suppliers’ plants. Haster is very rich and successful. He has the money, time and capacity to bring VW and, previously, BMW to their knees for this type of bullying.

Lesson for buyers: When a molder, who only does a few thousand a year in sales, is your sole source for a custom part, the molder controls you, not the other way around.

With all this in mind, remember what it is you are selling as a molder: Your expertise and delivery performance reputation, not plastic parts. Your customer's buyer would love to “inspect” your plant, steal your tricks and see how you use your gadgets to the fullest. He is also on the perpetual hunt for your quality/profit improvements, after which he will demand a price reduction. He does not need to see your operation. More importantly, cost isn’t king. If you don't believe me think about the last time your customer paid for overnight air freight because he messed up the order forecast.

Real world examples from my consulting clients

Buyer: You're making too much profit, we need a price reduction.

Molder: Profits are good. You agreed to our pricing when you placed the job with us. The price was quoted based on our expertise (which we can control) and the material cost (which we cannot control). The cost of your parts is the combination of those two. If the material price goes down, we'll pass the savings along. If it goes up, we will raise the price. How much or little profit we make is our problem, not yours.

Buyer: We are on a just-in-time manufacturing plan. I expect you to have inventory on hand to deliver goods as we need them.

Molder: We are neither your bank nor your warehouse. We expect a frozen order forecast for the next four weeks and a planning forecast for the following six weeks. This is a rolling forecast updated weekly, adding the fourth week to the frozen forecast. If you want a standing stockpile for us to ship from, we can negotiate a min/max production purchase order. For example, you authorize the next three-month shipments on one PO and ship in releases from there. Either you will pay for the entire authorized amount in six months or when we reach a minimum inventory level, where we will need to rebuild to another three-month supply, whichever comes first. You get the economy of scale of a large order paid in proportion to your releases for only a small storage fee. Failure to buy “dead” inventory within the allotted time will put all your jobs on a COD basis until the account is paid in full.

Buyer: In order to improve our cash flow, we will now be paying on an N-60.

Molder: Our quote stated a net 30 starting of receipt of parts at your facility. If you cannot pay within that time initially, we will ship on a COD basis defined as, once your check clears, we'll ship your parts. Not before.

Buyer: I'm giving you a task to reduce all your prices by 5% in the next six months.

Molder: We agreed on the price when we got the job. If you would like to pay us for better or new equipment that will improve our productivity, from those savings (if any) we'll pay you until the equipment is paid for and we own it, and then adjust the price in proportion to the savings.

Buyer: In order to do business with us, all the equipment you use must be less than three years old.

Molder: By doing a certification on your parts, it proves our equipment is accurate, precise and well-maintained to produce to your standards. You awarded us the job based on price, quality and delivery. We will stand by those metrics. You are paying for parts, not how shiny our equipment is.

Buyer: You quoted the job based on a 22-second cycle. We know you have improved it to 17 seconds and increased the yield. We want a price reduction based on those improvements.

Molder: We pride ourselves on continuing to improve our productivity, allowing us to take on additional jobs when we have more available machine time. We would agree to your proposal if you were buying machine time by the hour and yield. However you are purchasing parts at $/1000 pieces. If our cycles slowed or yields degraded, we are convinced you would not agree to a price increase. Like you, we need to make a profit to stay in business. So, we politely decline to lower the cost."

Buyer: There are other molders we've cross quoted, who can do this job cheaper, better and faster. If you can't meet their new pricing, we'll consider pulling the job,"

Molder (put in writing to the buyer): Per our conversation on XYZ, we consider this a threat. You only get one per job. Doing business with us affords you the luxury of a painless supply of quality parts. We would be interested in seeing the documents you have used to come up with this idea and will consider our actions accordingly. You have always been free to move your business elsewhere to improve your own profits. Please refer to our Discontinuance of Business policy on the back of our quote on how to change suppliers for this part with minimal disruption to your supply chain. If in future conversations we feel you've made another threat, we will initiate the Discontinuance of Business regardless of your supply chain status.

This list is literally endless. However, the two takeaways you get here are simple:

  1. If there's an agreement in place, that's the one you follow.
  2. It is OK to say NO to your customers. Most of the tricks they will pull on you are bluffs, because they need an ongoing stream of parts more than you need the business from them.

Keep to the rules. Business is easy: They order, you ship, they pay. Why make it complex? If you want yelling and drama, raise teenagers.

Bill Tobin is a consultant who teaches seminars and helps clients improve productivity. He can be contacted at www.wjtassociates.com or by e-mailing him at [email protected].

Read the previous articles in this series:

"Molding tricks for higher profits: The expert syndrome"

Molding tricks for higher profits, part 2: The philosophy

"Molding tricks for higher profits, part 3: The mold"

"Molding tricks for higher profits, part 4: Filling the mold"

"Molding tricks for higher profits, part 5: Cooling the part"

"Molding tricks for higher profits, part 6: Beating your customers at their own game"

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