"Dear valued supplier," the letter begins. It goes on to cite generic examples such as ever increasing pricing pressure in the customer's industry, foreign competition, rising costs of raw materials, accelerating energy expenses, etc. "Therefore," comes the punch line, "we require a five percent cost reduction for the services we procure from your company. Please contact..."
The lazy and uncreative manager has but two options when this letter arrives. One is to ignore the request and risk damaging a customer relationship. The other is to reduce the sales price by five percent. You know that, unless your product or service is grossly overpriced, pulling five percentage points out of your profit margin and handing it back to your customer is not a formula that favors the long-term success of your business. Guess what? Your customer knows that, too.
So, how do you respond to the request in a way that is acceptable to the customer without adversely affecting your bottom line in the process?
The answer is that you must find a way to reduce the customer's cost of doing business with you with a solution that, in the end, costs you nothing or even improves your own financial performance. Chris Haasch is a senior sales engineer with Pioneer Metal Finishing, an industry leader with facilities in Minneapolis, Minnesota; Green Bay, Wisconsin and Monroe, Michigan. Haasch tells me, "Pioneer offers recommendations to improve our customers' overall manufacturing processes, such as the use of different alloys, logistics and alternative finishing services. These ideas minimize lead-time and cost of quality. In some cases, the total cost savings we generate from developing the ideal finishing process exceeds the price we charge for our service." Sounds like a pretty good deal for the customer and the finisher. Here are some more suggestions:
Tooling—This is perhaps the most obvious alternative. If you can increase your throughput and decrease your direct cost by modifying or adding production racks, some of the cost savings can be passed on to your customer with no negative impact on your profit margin. In many cases, your customer may be willing to share in the cost of the racking if it offers an attractive enough payback.
Value Added Operations—Consider your customer's value stream map. What manufacturing or other processes are being performed on the customer's parts immediately before or after you finish them? You might be able to add cleaning, packaging, labeling or simple assembly operations and, since your employees are already handling the parts, possibly at minimal incremental cost. Assimilating these operations into yours—even if you must charge the customer to do so—may reduce the customer's costs to a great enough degree as to result in an overall cost reduction for the customer.
Hold inventory and ship to pull—many customers have seasonal sales cycles and may be required to build inventory ahead of their busy season. Assuming you have some extra space, offer to hold their excess inventory in your facility and to keep a certain amount of finished stock on hand to ship on demand. Doing so will not only reduce your customer's cost of carrying the inventory, but offers you the added benefit of finishing product as it fits your production schedule.
Share best practices—my favorite example is of a Midwestern metal finisher that managed to cut their workers' compensation costs in more than half over three years by implementing a comprehensive safety and employee incentive program. One of the finisher's customers had a serious problem with escalating workers' compensation costs. When the customer requested a cost reduction the finisher explained why a price cut was not an option. Instead the finisher offered to assist the customer in designing a workers' compensation cost reduction program similar to the one that the finisher had put into practice.
The list of additional ways to cut your customers' cost of doing business with you is seemingly endless. Consider alternatives such as decreasing paperwork errors, offering electronic invoicing and order status updates, decreasing lead times, improving quality to the point that customers can eliminate receiving inspection, passing on the savings you achieve by improving internal yield, participating in a customer-sponsored lean manufacturing program and so on.
The message should be clear. When your customer requests a cost reduction do not roll your eyes and simply cut prices. Instead, be creative and arrive at a solution that reduces your costs and enables you to share the savings with your customer or find a way to decrease the cost to your customer of doing business with you.