It’s time to get tough with your customers. Huh? Although it hardly seems like the business climate will allow it, setting guidelines for your potential clients to follow will actually make you more profitable than if you regularly low-ball your quotes. This four-part series shows you how a policy manual protects you from predatory business.
Talk to any lawyer. When he writes a contract for you it will always be to your advantage and to the other guy’s disadvantage. Ask your attorney a little further and he’ll give you the big law of commerce: The last contract that changes hands before business commences is the one that is in force.
In the molding business this is usually your customer’s purchase order. It means unless you change things, you end up playing by his rules (written by his attorney, to his advantage, not yours). The next big law is, any contract is enforceable when signed by both parties, regardless of the terms, until a judge says it isn’t.
Contracts should be fair. They should be as simple as, “You order, I build, I ship, and you pay.” While we all know it’s never that simple, there’s no need for it to be overly complex.
First, let’s really understand the purchase decision. The only thing any customer wants is a steady supply of acceptable parts. CpK, Six Sigma black belts, TQM (total quality management), lean, and all the other garbage mean nothing. Price means nothing. If it did, your customer wouldn’t pay for expedited airfreight when he runs out of parts.
How you run your business (within the boundaries of the law) means nothing to your customer, either. How old or young your machines are means nothing. Your scrap rates, cycle times, and operator training mean nothing.
It’s kind of funny (or should be) to hear a buyer say, “If you can drop the price to $0.05/1000, I can place the job with you.” Really? A business package of $80,000/year will hinge on an overall price cut of a few hundred dollars? Horse hockey! But this quaint piece of street theater happens all the time.
How do you deal with it? When he asks for the $0.05/1000 (he’s basically ignored your quote) raise the cost by $0.10/1000 (ignore him). Then when you’re done trying to show who’s more macho, go back to your original price. Tell him to tell his boss your price was $0.10 higher but he beat you up and you dropped back the $0.10. These are kids’ games, but sometimes it must happen.
What this really shows is the game of business. Most suppliers have only a basic understanding of the rules of this game because their business is making parts and/or tooling. Unfortunately, purchasing agents attend seminars on how to beat up their suppliers to lower costs. This is the infamous cat and mouse game: The customer is the cat—hunting skills, teeth, claws, and all—and the supplier is the mouse, whose only real skills are agility and survival instinct. If you’ve ever watched your cat take out a mouse, you’ve seen that the mouse doesn’t have a good batting average.
Your business is molding, not contact negotiations. “But,” you may say, “they dictate the terms!” News flash: They only dictate the terms because you don’t. Think about it. How do you level the field to where you can do what you do well and still end up making a profit for the company? Actually, it’s fairly simple: Have a policy manual—and use it.
This series of articles will give you the arguments and justifications for using a written manual. A policy manual is like a prenuptial agreement in a marriage, with the sole purpose of laying out each party’s actions in the event of a divorce. If the marriage goes well, the prenup is never used. With a policy manual, what you are communicating is your actions when things change or go wrong. A policy manual doesn’t have to be as thick as a phone book; it can be done in a few dozen pages.
So just what is a policy manual? It’s a document that explains how you do business. Here’s how I break it down:
1. Who’s in charge.
2. How you quote.
3. How you’ll get paid.
4. How you’ll renegotiate prices.
5. How you handle a tool being removed.
6. How you handle shipments.
7. How you handle changes in shipping frequency or volumes.
8. Your policy on quality reporting.
9. How you handle rejects.
10. How and when you’ll communicate with your customers.
11. How you’ll handle gratuities.
How do you get your customer to agree to it? Simply be polite and firm. Publish your manual. Assign serial numbers to each copy. Have the last page be a signature page with the manual’s issue date and serial number on it. With every quote, reference that customer’s copy of your manual by serial number and date. Before you do business with him, insist on receiving a copy of the signature page returned to you with the company-authorized agent’s (usually the buyer) signature and date.
Don’t accept a PO until you have the signature page and a reference to your manual on the PO. This is either on the PO you accept, or a letter you send after the PO is received asking for an acknowledgement. He only has to do this once. So long as you don’t revise the manual, you’ve set the ground rules for your business relationship.
This will take a little insistence but remember: You’ll get the job because you can produce a continuous supply of good parts on time. All this manual does is set out the rules if this doesn’t happen.
1. Who’s in charge
Business is between a buyer and seller only. There are no exceptions. Ultimately it comes down to money. Your policy manual should designate the authorized representative on both sides of this transaction. Shipping schedules, quality requirements, price changes, and so on should only go between these two individuals’ authority. It is their job to disseminate this information to others. A reject may be discussed with engineering and quality, but it has no weight in the business relationship until the authorized representative makes it official in writing.
Documentation must be traceable, either in writing or electronic, so that any question can be resolved by reviewing the records. Today’s business transactions are usually done via two computers communicating. There must be a person involved in this loop to see that things go smoothly.
This policy disallows engineering from making unfunded changes, or quality from deciding arbitrarily to reject a production lot without the authorization of the person whose job it is to maintain a steady stream of acceptable parts.
In Part 2 in the April issue, Tobin explains how to quote and get paid. You can download the policy manual here.
Plastics industry consultant Bill Tobin is a regular contributor to IMM. You can sign up for his newsletter and find free downloads to help your business at www.wjtassociates.com.