Your customers may demand that you give them firm pricing for raw materials, but here are 4 reasons that say “Ain’t gonna happen.”
BUSINESS CYCLE Business Cycle is currently in a downward phase. what savvy organizations should be doing right now is planning for budget reductions, cross training employees, evaluate vendors for sustainability. Nothing in the business Cycle justifies firming up pricing at this time.
BIAS TOWARD GROWTH Everyone expects the prices of things to grow, particularly for commodity raw materials. The Steel Benchmarker chart for hot rolled steel band shows that this is hardly ever the case…
VOLATILITY That Steel Benchmarker chart shows a price differential ranging from 4.5% in 2012 to a high of 100% in 2008. This is why your customers want firm prices, not why you should bet your business on giving them firm prices over which you have no control.
DETERMINANTS OF DEMAND What is driving demand for the raw materials? is it even North American, or is it China or emerging economies? Global demand is typically what is driving prices here in US and around the globe. US GDP growth in 2013 was estimated to be 1.6% China’s 7.5% Pick a number. Any number.
Customer’s seek firm prices to eliminate their risk, but shoving risk onto suppliers unilaterally is not eliminating risk, it is just getting it off their desk and onto yours. Our job as sustainable, competitive, quality suppliers is to intelligently manage risk. In today’s raw material environment, saying “No!” to agreeing to hold firm prices for raw materials when you have no ability to effect that price’s firming is intelligent management of risk.
Full article on why you are not the Carnack of Metals.
In the old days, everybody knew that it was cycle time that won you the job over the other shops…
Cycle time is a major determinant of price per piece, but it may no longer be the main one. (I’m going to ignore the effect of setup time and order quantity in this discussion. These can also be a major influence in price per piece on smaller lot sizes.)
Here are 7 other determinants of piece cost:
Cleanliness– some parts require millipore tests to assure cleanliness on parts for sophisticated systems. Costs to obain this level of cleanliness can exceed the cost to whittle the part out of the barstock.
Surface finish– what the machine can deliver may be acceptable, but when the customer demands to see CPK for surface finish, now you are talking about a secondary operation for grinding, honing or other surface finishing process- at an additional cost.
Certifications and paperwork– No I’m not talking about mill certs for raw material, I’m talking about customer required documentation that requires outside labwork, analysis, testing or validation. In specialty areas like aviation, medical, and automotive, the cost to prepare paperwork submissions (especially first piece submissions) easily exceeds the value of the parts provided. Making aircaft parts? Something on the U.S. Munitions List? You know what I’m talking about.
Post process steps– Plating or heat treating costs can exceed the cost of the basic part depending on the process and application. Transportation to outside vendors also adds to this, as would the compliance costs if the shop is capable of doing these processes on site.
Packaging– In a day when supply chains span the globe, multiple time zones, and climate regions- where our metal products may be exposed to salt air on board ship or depressurized air cargo holds at 35,000 feet- packaging to preserve product integrity can be a cost driver. Especially if to Mil-spec and or the requirement mandates the need to preserve integrity for a period of years.
Tolerances and capability– I have seen parts where a new engineer has decreased the tolerance so much that the product can no longer be made on the economical machines that exceeded requirements for the past five years. Requiring Cpk that exceed normal manufacturing expectations “just for safety’s sake” can also result in moving a part off a multispindle automatic with short cycle times onto several CNC machines (to maintain volume) just to get that extra “kick” of Cpk. The risk that was eliminated is now reflected in the new cost of the more expensive process.
Raw Materials– on tiny, high stock removal, highly engineered parts, the cost of machining probably does exceed the cost component of the raw material. Show me a part that looks essentially like the piece it was made from, and I’ll show you a part where raw material cost, not cycle time, is the primary cost driver.
Transportation, including premium freight for parts or paperwork, is another item to consider. The point of this post is not to whine about all of these additional requirements- it is to point out that they can be a frictional cost, a parasitic load that increases part costs, and yet are under the control of the Buyer. These costs, either separately or in combination, may be the main drivers of why that 15 second part now costs so much.
Sales people and estimators- unless you actively review the real needs with your customer, your blind acceptance/compliance to all of these “Additional Requirements” may be the real reason that the customer comes back saying that “Your price is too high.”
I teach my students that critical thinking is recognizing and challenging assumptions. Critical sales and estimating, if they are to be successful, might share that definition of recognizing and challenging those assumptions that add cost, but not value, to our precision machined products.
This is a graph of the 4 week moving average of total rail traffic from ASI Transmatch. The data is through December 5, 2009, or 48 W 2009.
The 4 week moving average for 2009 appears to be ready to cross the 2008 total shipments.
Rail shipments are an excellent proxy for economic activity in the broader economy, as they reflect the real demand for the raw materials and finished products for a broad spectrum of commodities and merchandise. Both the slope of the 2009 moving average and the imminent approach to 2008 are positive signs of improvement, in our opinion.
Rail Traffic Data is Warren Buffett’s “Desert Island Indicator“- the one indicator that he would choose if he were on a desert island and had only one indicator to use.
The use of rail data as a proxy for the health of the economy was also an important plot element in Ayn Rand’s influential novel Atlas Shrugged. (If you don’t have time to read the 1088 pages /1.3 pounds of this book, then read the review here -just scroll down to the first review towards the bottom of the page. Or you can wait til the movie starring Charlise Theron is released in 2011.)
You can sign up for the rail shipment data here, in the Yellow box.
Thanks to John Griner of PMPA member company Griner Engineering whose conversation inspired this post.