We have enjoyed many of Steve’s posts via Linked In, this one I just HAD. TO. SHARE.
I was contacted recently by a potential customer asking for our hourly shop rate. When I asked him why, he said it was so that he could compare our services against that of our competitors. I told him that our hourly rate doesn’t really matter when looking at the overall cost of manufacturing a part and choosing the right supplier.
He did not understand what I was talking about so I went on to explain it like this. Let’s say that Company X has a new state of the art Whatzit machine and Company Z has a 10 year old Whatzit machine. Company X charges $ 100.00 per hour on their machine, Company Z charges $50.00 per hour on the machine that they have. Which company are you going to choose? I’m guessing that you have decided to go with Company Z because they charge only $50.00 per hour. But, did you know that with technology improvements a new Whatzit machine is actually 50% faster than they were just 10 years ago? This actually makes the price the same between the two companies… or at least close.
But what if the pricing wasn’t the same? Let’s say that two companies quoted production of a part and Company A came in around 10% cheaper than Company B. Do you automatically give the project to Company A? If you do, you’re certainly not alone. Many companies do this all the time and the lowest price always wins. But is it really a lower price if you have a lot of rework? Is it truly a better price if the project is late? Here are some questions I like to ask to really find the lowest overall cost:
Does this company have a track record of on-time delivery?
How is their quality and what is their rejection rate?
Can they track my material and offer material certification?
How easy are they to deal with?
Will a real human answer the phone?
Are they convenient to get to or are they located in the middle of nowhere?
Are they ISO certified and do they have a Continuous Improvement plan?
Are they the newest kid on the block or are they an established, stable company with an Outside Board of Advisors?
All of these questions (and likely more) need to be answered to make sure that you are dealing with a reliable and reputable company that is going to provide you with a good value and be around to service you for years to come. I’m not saying this is the only way to evaluate a supplier. I’m just sharing some things to think about.
In the precision machining business, nobody sets up their machines based on the quality or price of your barstock. They set up their machines based on your delivery (service).
Ability to provide your product on time and to specification is the true determinant in the real world of execution. Thats why there is a gap between the dream world of business plans (what we think we can get) and the real world of monthly operating statements (what we got).
The delta (difference) between the two is a failure of some supplier to service (provide what needed as needed as planned.)
Quality: Either the quality of the product meets requirements, or else you will get claim/return and won’t get the order (again).
Price: You will meet the market price for whatever comparables exist for the same requirements- or else the lowest priced comparable product will be selected.
Service is the only differentiator in my experience;
Therefore it is only your ability to serve the customer with immediate delivery/ provision as needed that is a differentiator.
PS.: Consumers consider service to be part of the landed cost, and don’t want to pay extra for it. In the industrial sector, service is a given.
Unless they are family, or are under encouragement from someone on the Sopranos, people have three reasons to buy from you. The lowest price. The best quality. The best delivery.
Which do you think it is?
When I was the newly minted quality manager at a little steel operation in Medina, Ohio, I was confident that the reason people bought from us was because of our quality (that’s the second answer shown above). I’m betting that many of you believe that too- your brochures and websites always have a big section and color photo about your quality.
My vice president at the time was convinced that customers bought solely on price. “The Sales Department is always coming in here trying to get me to lower my price.”
And that was true- it was always the outside salesmen who were trying to wheedle down the price another fifty cents or a buck, it seemed. So my VP was convinced that it was the very first answer given above. The Wisdom of Inside Sales.
It took a veteran inside salesperson to straighten this out for me.
“It’s not your Quality,” he said to me, saying quality with a capital “Q”. “If your Quality isn’t adequate, he’ll never call back again. You won’t get any orders. Quality is a given.”
That took the new quality manager down a peg or two… “And it’s not price. The material will sell for the market price- what the market says its worth.”
He let me stand there and think for a moment.
“Hmm, I’m wrong, the VP is wrong, and the outside sales guys are wrong?” I asked.
“I take orders from customers all day long. That’s what I do. None call me and say, ‘I’d like some of your quality XYZ today.’ Every customer that calls me asks me this question: “Do you have any XYZ in stock?” “Do you have it in stock?”
“That’s why people buy from us! ‘If it’s in stock, we have it.’ It better meet the standard for quality, or they won’t call again. They won’t pay one penny more than what it would cost if they could get it someplace else- if someplace else has it in stock.” “People buy from us because of our delivery.”
For those of you keeping track, that is the third answer.
The best delivery.
And that’s my final answer. What is your final answer? How does the answer in your head match up with your company’s sales materials? Web site? Inventory policy?