Mar 06 2008

THE STICKER SHOCK OF A MATERIAL PRICE INCREASE

Published by at 12:57 pm under Uncategorized

You get the email, fax, phone call etc. from the resin company.  Crude oil is above $100USD per barrel and the cost of feed stocks has increased proportionately.  The letter concludes with a new pricing schedule for the plastic you buy and it hasn’t shown a drop in pricing since you were in short pants.  Now you have to call up your customers and pass this cost along. You feel like a Tantrum Trainer from his response to this sticker shock but there are things you can do. 

Plastics are on the short end of the uses for oil. Thus every polymer is at the mercy of the feed stock prices and the price of crude.  The resin companies simply take all their costs and profits; sell it to the distributors who also add in a mark up who in turn sell it to the processors.  Processors should simply mark the material up again.  Material is now 70-95% of most part prices, leaving what the molder does (sell machine time) only a fraction of the product cost.

With all that said why are molders so reluctant to pass through materials cost increases?  Everybody upstream from them passes the cost through with little concern.  Why would the molder’s downstream customer not accept the price change?

The answer is simple: fear.  The same fear you had when you were six worrying about a monster under your bed.  But this time it’s the fear of being rejected (not getting your price increase) or the fear of having the job pulled.  Interestingly enough, these fears today are as credible as the fear you had as a six year old.

You call up your customer and with the dread you felt getting caught with your hand in the cookie jar twenty minutes before dinner; you explain the situation and beg for a price increase (functional word is beg).  The buyer, whose job description specifically states the measurement of his job performance is how much money he saved or costs he’s kept in line, firmly and simply says “No”.

The “No!” is actually the first step of a gambit but most molders (who expect the rejection) fail to see it that way.  The second step in the gambit are words to the effect ‘If you can’t keep the pricing level on this product I’ll . . . . (Here’s where the fun starts) A. Give it to one of the guys in the lobby who says he can underbid you. B. Send the job to – China, Mexico, Mozambique, Dubuque, or some other exotic place.  C. I’ll never, ever, Ever, EVER give you another job to quote on again!” – followed by whimpering, crying and other such emotions indicating either Going Postal in the next few days or a forthcoming nervous breakdown.

Usually the result of the temper tantrum on the part of the buyer is you back off and watch the price increase eat a hole in your profits like a flesh eating virus.

The Rule Of Sanity and Reasonableness:  Let’s take a look at the situation before the telephone call, the anticipated responses of the buyer, and lastly what you’re going to do through the level headed eyes of Reality.

The situation:
The resin company didn’t raise prices because they were mad at you; it’s a generic increase to everybody.  The ‘guys in the lobby’ are going to buy the resin at the same (increased) price you are.  Also they haven’t had the time that you’ve had to optimize the cycle.  It can be rationally concluded that if the job is pulled, they’ll lose more money than you.

You didn’t get the job because of your winning smile.  You got the job because you were both the low bidder and you haven’t disrupted your customer’s supply chain to the point of him pulling the job.  Anybody else will have to overcome these two hurdles and do better than you.  The odds of this are highly unlikely because you are a known quantity and the other guy isn’t.

The buyer’s anticipated responses.
Buyers attend seminars on “negotiating” that are really training techniques for bullying you financially into submission.  If you take notes or record the ‘No I won’t accept the price increase’ phone calls, you’ll quickly see they are all scripted and repetitive.  The buyer’s job is not to appreciate the subtleties of the plastics business; it is to provide a continuous stream of products to his production lines at the lowest possible cost he can manage.  This includes, but not limited to, driving you into bankruptcy on the ‘there’s a million guys in the industry like you’ mentality.  In this sense he has the empathy of a snake looking at a rabbit; whether your business thrives or fails.

An excellent technique in winning a negotiation is to appear to lose when you actually win.  Here’s one strategy that is currently in use:  Customers tend to buy products that consist of only a few resins.  As a part of your Customer Resource Application Program sit down and educate the buyer on how you purchase plastics:  Tell the buyer he could get a very spiffy deal on pricing buy bundling all his supplier’s needs into a consolidated resin contract.  Thus when you order resin for his jobs, your prices reflect the purchasing power of his entire vendor base.  This C.R.A.P. program will offer much lower prices than he’d get under any other circumstance.  He’s a hero!  He’ll get the credit for a zillion dollar cost savings, and you are no longer the victim of his wrath when prices go up. J

The eyes of reality:
First, catch a clue:  You’re not a molder; you’re a businessman whose business is to run a profitable molding operation.  If you wanted to be non-profit you’d be a charity, church, or a political party.

Part of your original quotation or acceptance of the order must have language in it stating your quote is based on a certain material at a specific price and you will revise the pricing when resin prices change.  If you haven’t put this in your PO it is part of the Uniform Commercial Code.

You don’t have to be a Philadelphia Lawyer to figure out that your ONLY obligation to do business with a particular customer is when you accept a specific order to produce parts. The functional word here is accept.  You have the right NOT to accept any order. This may be a discrete purchase order or a release based on a master purchase order.  Your anticipated relationship with your customer base is commonly order-to-order without a guarantee that they will always continue to buy parts from you because they can’t guarantee the sales of their product.  Thus you can switch customers with the same impunity as they can switch suppliers.  If the pain of dealing with a customer outweighs the profits he generates, it’s only good business to ask him to take his business elsewhere.

Second, some customers come complete with an IQ.  There’s a simple economic formula in the buyer/seller relationship.  You have Price, Delivery and Quality.  Generally you get to pick two of the three.  Buyers tend to forget that “Price Is King” only when there is an overabundant availability of Delivery and Quality.  If you point out all three variables are interrelated sometimes they Get It.  This very mentality was what drove the Chinese toy manufacturers to begin using lead paints – the American buyers kept insisting on lower prices but sustained delivery and quality.  The only choice the Chinese supplier had was to lower the cost of his raw materials (and lead based paints are really cheap).

Sometimes you have to listen to the purchasing agent go through a Three Act Opera Snit complaining about how his costs are going up.  You might suggest increasing the amount he purchases in to take advantage of your volume pricing or something else.  But bottom line, it isn’t in his best interest to disrupt his supply chain by pulling the job or get you mad enough to stop doing business with him.

Be a businessman.  When/if it comes to a showdown, hold firm to your pricing.  There’s nothing wrong with thinning the herd because as more business is low balled by the Guys-In-The-Lobby (who’ll go out of business), you’ll be asked to quote their jobs.  You’ll get to pick the jobs you want because at that point in time the purchasing agent is in no position to complain about pricing.

* + * + * + * +

This article is virtual.  I’ve been preaching its contents for decades.  You can print it out and use it to explain to your customers that their need for you is much larger than your need for them and (like marriage) a friendly relationship will always work better than an adversarial one. Or you can roll up the printout and swat the sales people on the nose repeatedly for only being concerned with keeping the business and not caring about profits.  OR you can ignore it, low ball the competition, and then wonder why in only a short period of time, your paychecks bounce.

Your choice.

3 responses so far

3 Responses to “THE STICKER SHOCK OF A MATERIAL PRICE INCREASE”

  1. Phillip weltonon 10 Mar 2008 at 6:31 am

    New to the industry, thanks for the eye opening article.
    I asked our scheduler what the purge factor was, and he estimated 5 – 15 lbs based on the machine.
    Our quoting process and bills of material do include this factor.

    Thanks

  2. Tony Dumbillon 26 Mar 2008 at 8:27 pm

    I have been to China recently and found a company mixing polycarb with styrene and still call it polycarb this is another way they keep price down.

  3. Paul Jiangon 29 May 2008 at 7:36 am

    i hope the my friends of china IMM forum will interest this article,i have translated for them.

    tks

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