April 1st, 2021
Thoughts to Ponder When Dealing with Price Increases
As a material and component supplier, I have experienced the unpleasant task of passing along my share of price increases to door and window customers. Obviously, the news is less than welcome on the receiving end.
So, what can door and window manufacturers do to remain competitive, given the latest series of material and component price increases?
There are three main paths that manufacturers usually consider when it comes to controlling cost increases. The first is negotiation. This is where the general manager or purchasing agent goes out and gets quotes from other suppliers eager to gain their business, and then come back to current suppliers with a handful of competitive quotes in order to negotiate lower prices. A potential problem with this approach is that there is a risk involved in changing suppliers if the current supplier has been a reliable partner and has never let you down. By threatening to switch, you put a strain on your relationship with a valued business partner. If another supplier has a significantly lower price, then you must ask yourself, “How can they afford to do so? Are they cutting corners? What level of customer service do they maintain? What is their track record when it comes to on-time delivery?”
Switching from a supplier with a known track record of quality and on-time delivery to a different one, with an unknown track record, can be a risky proposition. If the quality or on-time delivery of your own product suffers as a result of switching, then you may find yourself losing your own customers down the road and regretting the decision to switch. This could have lasting effects on the long-term growth and profitability of your company.
Perhaps a better approach than negotiation is to seek a more solid relationship or partnership with one’s existing supplier, so that the next two approaches can be done with the supplier’s input and assistance. Read on!
The second path often considered is vertical integration. This is where the president or owners say, “Well if these components are going to keep going up in cost, then let’s make them ourselves!” This is a path that deserves careful consideration, because it has its pros and cons. Indeed, it is quite possible to reduce component costs by making certain components yourself, but not always. First of all, in this very tight labor market, additional workers will be difficult to find. This is a big part of why your component suppliers are having to raise their prices to you in the first place. So, if you are faced with the same challenges, as they relate to labor, then you will have the same issues.
On top of this, you may not be able to buy the raw materials needed to make the component(s) in question with the same economies of scale that your supplier enjoys. Other considerations here are the investment in the necessary machinery to make the component(s) in question and the learning curve that must be overcome before proper quality is achieved. Given labor challenges, automation would definitely be the way to go here, but lead times on automated equipment are definitely much longer these days. Another key factor that must be considered before deciding to vertically integrate is to consider if such a move aligns with your company’s core strengths. If not, it may weaken your company by distracting your organization from what you really do best – like making and selling windows!
The third possible path to consider is value engineering. The idea of value engineering sprung up in the 1940s at General Electric, in the middle of World War II. A purchasing engineer named Lawrence Miles and others sought substitutes for materials and components, since there was a severe shortage of them due to the unusual demand spawned by the war. Substitutes were sought to reduce costs and provided equal or better performance.
The thing that must be stressed, however, is that value engineering should not only consider alternative materials and components, but also the process and the machinery employed. So, the total overall cost is a function of not only the materials used but also the labor, the overhead, the wastage and the “cost of quality” as well. So, a value engineered redesign that perhaps involves more expensive materials can still result in an overall lower unit cost and/or greater performance if the methods employed involve fewer people, improved efficiency and lower cost of quality. The Machinery can also contribute to these factors, especially if automation is involved.
But all too often, engineers may look at materials only in their quest to lower costs or improve performance, searching for lower cost materials that will get the same or better results in the end. They may fail to consider the overall picture, which includes not only the material itself but also the methods and the machinery employed.
The material may be a lower cost material, but alternatively one should also consider higher cost, higher performance materials that—when employed with different methods and different machinery (often automated)—may result in an overall unit cost that is lower while at the same time offering greater performance and more consistent quality in final products. Indeed, it was value-engineered!
So, when it comes to dealing with price increases, one of these three paths will likely be considered in your efforts to control rising costs. The more complete examination of the entire process may ultimately be the best approach leading to longer term solutions, which may ultimately improve your company’s strategic position in the marketplace.