Purchasing Strategies Part 3: Relying on Proven Competitive Prices for Manufacturing

Paul Ericksen / March 12, 2018

Getting a competitive price from a manufacturing supplier shouldn’t be that hard. When I was a sourcing manager — and later on an executive — I gave my suppliers the following guidelines:

  • At a minimum, I expected their best pricing. I never wanted to find out that a supplier was giving someone else a better deal than what they were giving me. If I found out they had — which we were able to do — the supplier in question would be taken off of our current quote list. At least temporarily.
  • If we were a supplier’s primary customer, I expected better pricing than they gave to any of their other customers. On the other hand, we did have policy limits maximizing any one supplier’s reliance on business with our company.
  • Finally, I told them that once a price was set they better have a very good reason for any future price increase requests. Why? Because I believed initial quotes should be based on good intentions. For that reason, any price increase request needed to be due to something beyond a supplier’s control, such as a universal increase in the price of a commodity.

Then, I had my Buyers manage to this thinking.

Good Buying Practices Go Hand in Hand with Good Supply Practices

I know that following a policy like the one outlined above won’t give a Buyer complete assurance that they are dealing with a competitive, financially healthy supplier, but it sure goes a long ways in that direction. I also had an expectation that every one of my Buyers would visit every supplier they were responsible for at least once a year.  I know that this could get resource intensive given how stretched most Buyers are today (translation: Buyers are expected to manage dozens — if not hundreds — of suppliers). But I really feel that OEM customers should have someone do at least a walk-through at every active supplier once a year. Why? To get (at least) a visual sense of how they are managing things such as workplace organization, quality, plant layout, scheduling and whether any of the “Seven Deadly Wastes” are readily apparent.

There is only one way that a Buyer within a particular product type might be able to get around a system of buying practices similar to the ones outlined above. They would need a significant amount of real data within a product group about prices that had previously won contracts across a variety of customers, as well as evidence of actual supplier order fulfillment performance. Bottom line, a Buyer would need to know that the offered prices have the same foundation of cost drivers as successful quotes given to other customers for similar parts.

The Ideal Purchasing Strategy

The ideal (in my mind, anyway) would be to have data from a cross-section of suppliers of a particular product type arranged by 3 main defining qualities: their part features, their piece-prices and the processes used to manufacture those features. The part data included in that database would be from previously successful quotes across a variety of customers. The data would also include the quality and on-time delivery performance the suppliers demonstrated.

Once you had the historic data from these jobs categorized and libraried, you’d then need some sort of algorithm to apply it to the parts in the new Request-For-Quote. The algorithm would need to be able to develop a piece-price that customers like you had paid for similar parts — ones that would be manufactured the way the new part would be. It would also need to be able to take into account a whole slew of external economic factors that could influence pricing over time, e.g. things like inflation, etc. If you wanted or needed better pricing than that, realistically, you’d either have to take cost out of your design, work with your supplier to develop some innovative processing strategies or both (sounds like Supplier Development doesn’t it!?). You’ll hear more about my thoughts on Supplier Development in future columns.

The New RFQ is Spelled: D-A-T-A

With access to such a tool, OEMs no longer need an empire of Cost Management cost accountants wasting time, analyzing pricing to try to figure out how to pinch another penny or two out of a supplier quote. Instead, your Honest Broker — the one who has assembled and organized the underlying data — would be able point you towards suppliers who have previously proven themselves (both on price and performance) on similar parts in the past, and who would give you a competitive price.

Sound familiar?

If this approach makes sense, you should really check into MakeTime, since that is the infrastructure they’ve developed and have loaded for bear.

Sustaining the Industry that also Sustains You

Over the last three columns I’ve outlined the history of piece-prices and how they were used both by suppliers and customers over the last hundred years or so. As I outlined in the first article on this blog, I believe that we’re due soon for another evolution relative to all aspects of procurement.  It is definitely needed as OEMs try to find more effective ways to bring competitive and sustaining sources on board. But piece-price is older than Henry Ford’s Rouge River operation cited two columns ago. There have always been different perspectives on what a good price is and what that price indicates about a supplier.

A good friend and procurement supervisor I once worked with — Chuck Trentham — showed me the following quotation, written by a guy named John Ruskin (1819 – 1900).  While it doesn’t cover all of the needed bases needed for industrial buying, it sure lays out a good general approach for buying and sustaining the businesses that also keep you in business.

Prices. It is unwise to pay too much. But it is worse to pay too little. When you pay too much you lose a little money, that is all. When you pay too little you sometimes lose everything, because you find that the thing you bought incapable of doing the thing it was bought for. The common law of business balance prohibits paying a little and getting a lot. It can’t be done. If you deal with the lowest bidder it is well to add something for the risk you run. And, if you do that, you will have enough to pay for something better. There is hardly anything in the world that someone can make a little worse and sell a little cheaper. And people who consider price alone are this man’s lawful prey. - John Ruskin

My next column will be on governmental economic incentives.

Learn more about Paul Ericksen and his over 40-years in the manufacturing industry here.