Oct 21 2014

Renegotiating prices

Published by at 12:09 pm under Uncategorized

Recently I had a client who told me his customer wouldn’t accept the price increase due to increased materials costs. Really?
Let’s give this a reality check – Your local gas station is changing prices almost on a daily basis. The phone company tells you they’re raising your rates. Do you call either of them up and tell them you “Won’t honor the price increase” but still demand their goods and services? Nope. If you do, then I won’t be able to call you in a couple weeks and you’ll soon be walking to wherever you go.

I show a picture in one of my seminars of a three year old little girl, holding the leash and walking a three year old German Sheppard. I ask the class “Who’s walking who?” They invariably get it wrong – they tell me the dog is walking the girl. Dogs have been taught when their pack is composed of humans, they will never be the Alpha if they wish to live for any length of time. The girl will always walk the dog.

As molders, when your customer tells you they won’t honor a righteous price increase they are really saying “I want you to lose money, so I can stay profitable”. Dumb isn’t it?

Resin companies don’t single you out for a price increase. When they raise prices, everyone gets the increase at the same time. Those who have in-house stocks of material may benefit in the short term but they cannot avoid the new price of material the next time they make a purchase.

This is one of the impolite components of JIT – you are always the victim of the marketplace.
Buyers say they won’t honor a price increase for five reasons (although the list is endless).

Because they think (automotive) “It’s a privilege to do business with us” they are so big, they do it because they can. This is usually accompanied with the threat of ‘dozens of people like you who’ll do it 15% cheaper’ or ‘we’ll go offshore’ and blah, blah.

They conveniently forgot (ignored) your quote that said: “The price is based on material being $X.XX per pound. Kilo, ounces-of-gold” etc. OR you were silly enough simply to quote a part price leaving off the material cost.

They tell you they can only adjust their budgets twice a year.

They tell you it will take at least 120 days to adjust the system to reflect the new prices and cut the checks.

KOST IS CING!!!!”

By the numbers let’s look at each one of these ‘reasons’:

#1 There is no ‘privilege’ to doing business with anybody. Those who pay their bills in full are good customers; those who don’t are problem customers. Recent history has shown us the degrees of ‘loyalty’ large customers have to their supplier base: So long as you do everything they want you’re considered loyal. But when you finally object to losing money, they’ll look for someone else to. If there a dozen local companies or offshore molders who could do it 15% cheaper you wouldn’t have been awarded the job in the first place.

#2 Forgetting or ignoring some clause in the contract is an interesting trick. However it cannot go ignored. Business is business.

#3 -#5 Anybody who tells you they can’t adjust the system, process a change, etc. has conveniently forgotten they paid premium prices to you when the really needed parts, or paid the airfreight to bring in the part to keep their lines from shutting down.

This is simple School Yard Bullying. So what do you do?

Most people, usually hang up the phone, whimper and ship the parts either at a minimal (read: unacceptable) profit or no profit at all.

What molders don’t realize is “Who’s Walking Who?” If your customer doesn’t have the $.05 part you make, he can’t sell his $2,000 widget. Who is in control of the situation? You, not the customer.
I’ve been shouting to the void for years about a policy manual (you can download one for free in the FREE STUFF section of my website). It addresses the concept of pricing changes.

I have one client whose system is so automated that when he gets a release to run more parts off an existing purchase order, or his quote finally becomes a PO: he contacts the customer and informs him of the current price of parts. If the customer agrees (in writing) he runs the order. If they don’t agree, he won’t run it. They do this for every order. It’s his ‘policy’ and he won’t be bullied otherwise. He doesn’t tolerate threats. Threaten to pull the job, he’ll tell you to come over this afternoon and pick your molds and parts, so long as you come complete with certified checks to cover everything you owe.

If you want to be a smarty-pants when your customer says he can’t (won’t) honor the price increase for three months, you can tell him you won’t (can’t) ship for three months. While this is a great way to start a yelling match; it does put the issue directly on the table.

In reality it’s a privilege for your customers to do business with you and not the other way around. You got the job because you can deliver a quality part, on time, at a reasonable cost. While there’ll be a big deal about being the low bidder; they’ll pay anything to keep production going. Occasionally you might remind your customers that YOU choose to do business with THEM. You both have the right to cease to do business with each other if the relationship changes any time you want.

The ultimate solution is to stand firm on a fair price increase. Don’t negotiate it. You are passing through the costs of doing business and you can’t tell the people who sell you the Customer Specified resin you won’t accept their price increase. If anything, your customer might want to call the resin supplier and mumble words about not longer being a ‘preferred resin supplier’.

As a business person you are entitled to make a profit. If you want drama and stress, have teenage kids. Tell your customers ahead of time how you’ll handle resin price increases. When they happen, tell them you told them about it and what the new prices will be.

Buyers are exceptional actors. While they’ll tell you they can’t do it, they can. When they say they’ll pull the job because of price, they haven’t lined anybody up to take it over and with JIT firmly grafted to things like PPAP, once they place the job it is almost impossible to relocate it in a short period of time.

Counter the buyer’s arguments with your documented delivery performance record. At the end of the day the buyer would rather have someone who consistently keeps his pipeline full than a low cost supplier who can’t deliver reliably.

* * * * * * *

You can read this, think you’re held hostage by your customers and go to bed crying.

Or you can ‘man up’ and not lose money anymore. It will be a little tough not allowing the buyer to bully you anymore but it will soon be a whole lot easier to come to work in the morning.

Or you can just ignore this until your customers put you out of business.

Your choice, it’s only money.

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