What's new
What's new

Discounts and increases

PracticalMan

Super Moderator
Staff member
Joined
May 14, 2009
By Keith Jennings

Click Here for a free subscription to Cutting Tool Engineering magazine.

I strive to start each year on a positive note, but 2015 sure hasn’t taken long to throw us our first challenging management scenario. It requires immediate oversight of rapidly changing economic conditions.

Just as the year was getting started, reports of weakening economies, collapsing currencies, job reductions and a volatile, collapsing energy market changed everything. In the U.S., the fall of oil prices has led to cutbacks in the energy industry, which is our bread and butter. As a result, many customers are going into cutback mode. The rapid downturn has created a near panic among many, and they didn’t waste time canceling or holding off on expected projects.

Adding to the drama, we received formal letters from two important customers explaining that “due to uncertain conditions and reduced demand, we want your cooperation and we really, really need you to lower all your prices, effective immediately— and we’re thinking a 25 percent reduction in everything is a good place to start.” OK, the letters weren’t worded exactly like that, but that certainly was their message, albeit stated in lofty terms, like “being a partner” and “helping maintain competitiveness.”

It wasn’t that I was shocked to get the let’s-work-together-to-contain-costs letters, but demanding that a shop offer a 25 percent reduction on all pricing was the most excessive request I’d received in a long time. And, while both accounts asked for the same percentage cost reduction, one even requested that it be applied to POs issued but not yet paid. That was a first for me. It’s not possible to lower pricing 25 percent on all in-house orders, so it didn’t happen, but it became obvious that current circumstances required a reassessment of strategy. We immediately started reducing spending, postponing noncritical projects and even trimming payroll.

On top of this, we identified a pattern of slow-paying customers that was trending worse, from large corporate clients to small operations. This means our shop must have enough cash on hand to float slow-paying accounts, or else our own payables will likely follow the same pattern. Floating customers is not good use of a machine shop’s cash, particularly when those customers were issuing sizable jobs and enjoying bonuses 2 months prior. Now, its chaos and calamity, resulting in shops getting squeezed, fair or not.

It’s tempting to vent, but as I discussed in last month’s column, we’re working in a global market and that requires effective management to survive.

While our shop always seeks and implements cost-cutting techniques, customers must understand that a lot of expenses aren’t going down—they’re headed the other way. Perhaps we’re able to make a part a bit cheaper and pass on some savings, but our costs for medical insurance, deliveries and freight, raw materials, licenses, permits and wages sure aren’t going to drop 25 percent. We can’t make such demands of our employees or our vendors.

When it’s all said and done, we’ll meet face to face with these companies, hear their stories and negotiate a workable response. We’ll trim as required and move on. We’re bidding on new items and I’m confident new opportunities will materialize. In the meantime, don’t take a request for a discount as an absolute. State your case and negotiate. CTE


-----------------------------------------------------------------


Click Here for a free subscription to Cutting Tool Engineering magazine.


*This article is reprinted with permission from CUTTING TOOL ENGINEERING Magazine, and is protected under U.S. and international copyright laws. CUTTING TOOL ENGINEERING Magazine is protected under U.S. and international copyright laws. Before reproducing anything from this Web site, call the Copyright Clearance Center Inc. at (978) 750-8400.
 
Sounds as though they have some new guys in finance eager to impress the boss by improving profitability quickly. Ignore or ...

You could reply explaining that you had been thinking of asking for a 25% increase in price to cover increasing costs, plus a requirement for a 10% interest payment for any accounts running over 14 days after billing.

It can work both ways of course.:)

cheers
 
Same letters were sent out to all venders of the major oilfield players here in Alberta. Most of them are now on the same bandwagon. Not many shops has 25% profit in most jobs. The slowdown brought everything to a abrupt halt here. It seems like now after a couple of months with no new orders, they are starting to send out "survivor" work orders to a few shops, (about 10% of the usual volume). Any shop that subbed work out before has pulled that back in house. Afternoon and evening shifts are gone in a lot of shops. I dont think we are anywhere near the end of this.
Darcy
 
"It can work both ways of course.:)"

I wish this were true, but it's not.
This is why, read it and wake up.

I work with many manufactures both in the US and China, and China is far more business oriented and treat their businesses like a friend to be helped, not an enemy to be coerced (like here in the US).

I work mostly with TEDA (Tianjin Economic Development Association). Manufacturing in TEDA cost dramatically less than the US, but not for the reasons you have been led to believe.

In TEDA, all manufacturing TAXES are as follows.
For the first 3 years, you have NO taxes at all. Nada. No limit on your income. For the first 3 years you can earn billions and pay NO TAXES.
For the 4th year, you pay a total of 13% tax.
For the 5th year, you pay a total of 17% tax.

That's TOTAL tax. In TEDA there is only one tax, unlike the morass here in the US. No local, state, and federal taxes. One tax and it's a MAXIMUM of 17%.

17%, compared to over 40% and even 50% total in some areas of the US.

Taking taxes alone, the difference between 40% tax and 17% tax means China can drop the price of their product to below the break-even cost in the US.
That's in addition to the cost of energy being ~40% less, wages at dollars a day, and a cooperative government which actually works FOR their businesses instead of against.
That's why a part from China retail often costs less than a similar part in the US wholesale.

We here in the US cannot compete, except for convenience or ignorance. Convenience to be able to work locally or ignorance on how easy it is to buy products and services from China. Visit Alibaba or Aliexpress lately? Try TradeManager!

Once this catches on, even more US manufacturing will be lost.

So get used to cutting your budget. Convenience only goes so far.

We only have ourselves to blame. Everyone who thinks a massive government is good, turns a blind eye to the reality of today, or approves of more taxation, is the problem.
 








 
Back
Top