in Vol. 11 - November Issue - Year 2010
The Pressure Is On. Be Faster! Be More Flexible! Be Better! Be Cheaper! Top Quality Surfaces At Discount Prices?
High-tech surface finishing facility
Increasingly, suppliers in the industrial surface technology field are being pressured from all sides. Quality requirements continue to become more stringent, while allowable delivery windows are narrowed and demands for flexibility in finishing and supply increase. Price negotiations, however, continue to become even tougher. Often a contract turns into persistent trimming along the edges of profitability. If this trend in adjusting expenses to price continues, many suppliers will run the risk that increases in quality-related claims will permanently undermine their company’s reputation. Because there can be no doubt about one thing: Regardless of the final price, there should be no cuts in quality or in the flexibility of supply.
In the past, distinctions were often made between 1st, 2nd, and 3rd tier suppliers. In reality, these categories are no longer used because 2nd and 3rd tier surface technology suppliers can’t survive in the long-run, at least not in the industrial sphere. In any case, 2nd and 3rd tier suppliers end up without any economic advantage given that these days claims-related costs can result in huge financial burdens. Re-supply, re-work, damages claims, and so on will exceed original finishing costs – and often by multiples. For this reason, companies are wise to take forward views to contracts and their pricing, and to engage in realistic risk assessments.
In many cases, processes are so narrowly calculated that you can’t fully project costs - even when initially entering into a contract. Often price assessments of extra work and required quality assurance measures, product testing, documentation, packaging and inventory costs are made only after the price has already been submitted. You quickly face harsh realities if you enter into a contract under these circumstances: Either you risk your company’s or division’s survival, or you end up having some really uncomfortable re-pricing and price-increase discussions with your customer. That is what we mean by acting with a forward-view!
Making clean calculations in light of all costs, input dimensions, and risks, is an important task. It enables companies to achieve transparency by agreeing on a price that can actually be defended. The industry sometimes requires a cost breakdown. The aim is to be so transparent that, on the one hand, everything is considered and taken into account and that, on the other hand, there is no room for a 75% margin.
(And especially when the supplier faces an anti-dumping challenge, a purchasing manager would prefer to receive a cost breakdown to enable him to test the supplier’s and the attacker’s commitment and to transparently reveal any differences).
In addition to direct production and administrative costs, you also have to ensure that the company’s objectives and growth are not undermined by harakiri-prices. One of the broader issues faced by companies is that not much money is left over for research and development, or for process optimization, qualification measures, and new capital investments. Both in the short and the long term, this condition can lead to an interruption in technological progress and can, in the worst case, undermine the ability to compete. At some point your low pricing will result in production that is no longer able to meet the state-of-the-art or in missing technological shifts in automation and modernization.
Of course, it can be a pain to defend and explain your price. And the supplier doesn’t often even have the opportunity to do so. You need to be creative to make a convincing case. Whether by phone, by letter, or by Power Point presentation, the path you choose will depend on the other party’s individual preferences and assessments. But you will have to make a choice because otherwise you won’t be able to become a supplier or you won’t stay one for long. Competition comes from around the world. How aggressive this competition is will depend on the sector, but it is increasing in intensity and brutality.
The end result: Top quality surfaces are an obligation. The route that leads to that outcome should be well-designed, properly assessed, transparently documented, and convincingly submitted.
If you are able to do this, you will be able to feel your company’s "good vibrations" for a long time to come…
by Dirk Gather
Contributing Editor MFN and General Manager of GZO GmbH, Germany