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Clare Goldsberry wrote a beautiful article "Not paying suppliers is NOT a winning business strategy." Yes, when working for a Goliath Corporation (P&G, The 'BIG 3 etc.), what never fails to amaze me is the arrogance these companies have, simply issuing a press release on how they will boost their profits with no care for their supply base.

Bill Tobin

May 17, 2013

7 Min Read
Tobin’s ANTEC “Nuggets”, part III: A Molder’s bill of rights, know the law

But maybe that's the issue: They don't care. I was talking to several suppliers at ANTEC and an interesting common thread came out in our 'war story' sessions (the Meet 'n Greet networking receptions). It goes like this: "We'll give you a PO for X-thousand parts per week, but we want you to be able to supply three times that amount on two days' notice; and no, we won't authorize or pay you to have this on hand."

I find it absolutely amazing that molders neither READ nor UNDERSTAND their purchase orders or have taken a short course from the Small Business Association at their local college on business law. Simply put, a customer can demand anything but unless it is in writing, signed by the appropriate parties, it carries no weight.

Let's review: A commercial contract is an agreement willingly made between two or more PROFESSIONAL MERCHANTS for goods or services. Functional words here are 'willingly' and "PROFESSIONAL MERCHANTS". A bit of finessing this language and we get delivery schedules and performance specifications.

Commercial law doesn't offer either party the protection of 'buyer beware' that is offered to the general public who are not professionals. It assumes both parties are skilled in the art.

Here's where molders get the short end of the deal:

Buyers go to classes, attend seminars and are constantly updated about the fine points of Commercial Code. Most molders are more interested in managing their companies than they are about the PO's that actually make their profit. And to that end, they lose.

A contract is considered "in breech" when the terms and conditions are not followed. What's important here is essentially the entire contract can be renegotiated if it is breeched.

So - Let's take a look at the latest piece of price bullying published in the Wall Street Journal of P&G wanting to move their payables to an n-75. Somewhere buried in your filing cabinet/computer is the Purchase Order your Bully Customer sent to you and you agreed to. First look at your quote and then the rest of the documents that now comprise the PO.

Interestingly, no matter how silly it was at the time, both of you agreed to some payment terms—perhaps net 30, or net 45, or net 60. It's in the paperwork! AND if you read the fine print (and understood it) hopefully you didn't give your customer the arbitrary right to change these terms at his whim.

So here's your protection: If they change the terms of payment, and you didn't agree with it in writing; the contract is in breech. Now you have some choices:

CHOICE #1 - Clare stated it perfectly: file a lien on the mold and shut down the machine until you are paid for the work you've done. Don't worry about the threats, in this case the law is on your side. If you get, "We'll pull the tools and give the business to someone else," know that they can't. How long did it take you to qualify the mold? Do you think anyone else can do it in an afternoon? As soon as the debt is settled, release the mold. The penalty for 'business interruption' is 3X the lost business value.

CHOICE #2 - If the terms of payment have changed, YOU can change the part price. What do you think the buyer would do if you wrote him saying "I'll agree to n-75 if you'll agree to a 5X price increase." Of course he'll go crazy! But you tell him the price will remain the same if the terms remain the same. Then shut off production and wait for his response. Again, as Clare said: If you're the only source of a $0.05 cent part that goes into a $500 component and your customer has committed to send in the volumes of 500/day; YOU have more power than he does.

CHOICE #3 - I've written several articles on this topic. Before you even accept any purchase order you should have a Policy Manual, which your customers have signed and sent back to you. This policy manual should be referenced in your quotations AND any documents relating to the purchase order.

  • It should have your policy on ordering parts (the customer orders it and buys it - no unpaid/unauthorized 'safety stock' designed to cover your customer's inability to forecast).

  • What happens when there's a reject - what do you both do? Did they find one part that was bad or all 10,000?

  • What happens and how do you handle the fact that the part is functional and cosmetically acceptable but not to print? Your contract will have words to the effect of 'parts in compliance per design XYZ.'

  • You should have a clear and concise policy on payment terms and cost changes.

Jose Lopez of GM was the first to popularize the concepts of stomping all over purchase orders with delayed payments, demanding 'give backs' and the like from his suppliers. However he didn't do it flippantly. It's based on a study; I believe was done by the Harvard Business School. What this study discovered was that if you demanded through a letter/e-mail that some fictional upper executive required the lowly buyer to cut his costs by demanding price reductions from the supply base or pulling the work (neatly shifting the role of Bad Guy to a faceless person on Mahogany Row) 95% of the suppliers immediately dropped their prices. What was more interesting was those who said "NO" didn't lose the business. This was because on-time delivery of acceptable product was more important than price.

Delaying payments is another form of price reduction, but in this case it's a cash flow game: Most molders are highly leveraged. They buy materials in 60-90 day supplies and the resin companies want their money. The molder's work force must be paid during the manufacturing cycle. The freight companies, packaging suppliers and everyone else expect to be paid. Waiting for 30 days after shipment of the order is also a problem because the molder has to pay off the money he's borrowed to finance all the above expenses.

Since we're not an industry that routinely gets away with double-digit markups over manufactured costs, the interest payments on the loans alone significantly eat into profit margins.

When the threat comes down that they'll relocate all the jobs if you don't agree ask yourself a few questions:

  • Who is capable of accepting ALL your work? Immediately?

  • Who is capable of agreeing to these new terms at your old price?

  • Who is capable of delivering parts to your customer's schedule?

  • Do you need all this DRAMA?

Another component of your Policy Manual should be an 'ethics' section specifically on how you deal with threats: Will you tell the customer to pay his bills, come by, and pick up his tools after the second threat, AND bring a check (per your policy) for all the material and other things you purchased to fill his order?

Business is simple: they order, you manufacture, you ship, and they pay. Repeat as necessary.

If you want your customer to bleed you to death or if you enjoy stress and drama; Have teenage kids, or invite your adult kids (complete with family) to move back in to live with you with free room and board.

If you don't need the stress or drama, remember YOU have the power. YOUR CUSTOMER doesn't.

A pro forma copy of a Policy Manual can be found in the FREE STUFF section on my website.

LEGAL STUFF: I'm not a lawyer. Some states have mold lien laws, others don't. Check with your local attorney before you do something that might be more than you can handle.

Editor's note: If you haven't already, be sure to check out the first two stories in the series covering simulation, conformal cooling, and more.

About the author: Bill Tobin's injection molding career began in 1968 at General Motors and has included stops at Ford, Mattel, Hewlett-Packard, and several custom injection molders along the way. In 1975, he founded WJT Associates, which provides design and project engineering consultation on mechanical designs, specification of tolerances, part manufacturability and machine costing, governmental and agency regulatory compliance, budgets and profitability improvement, and expert witness testimony.

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