I like your Product, but what about the Price?

Hamond Industries Ltd - the Slide Forming Specialists


An Article on cost reduction measures in a slide forming shop

Several times a year we get inquiries from our customers asking us if we can lower our prices. The answer is complex and requires our customers to understand a bit about how a slide-forming business works. This article attempts to clarify those parts of the discussion that are common to all the parts we make and all our customers. Some issues are specific to the particular part. For the part-specific issues, you'll still have to call us and speak to us in detail.

Assumptions - Total price is the key

I always assume that our customers want to reduce the total expenditure over time and not just the dollar price on the quotation, so I will also talk about freight costs and emergency supply. If you are in a different situation (for instance, some of my customers tell me that freight costs come out of another budget), please tell us when you call to discuss specifics.

At the design stage

The best way to reduce total costs, if you have the option, is to have your designers contact us before your design is finalized. At that point, we can put our designers together with your designers to work on your problem.

Our designers are not designers for your application area. Because we span so many different fields, we can't tell you about applicable standards or safety requirements in your field. But we can tell you about design for manufacturability.

Almost always we can suggest seemingly small changes that reduce our manufacturing costs (and therefore our piece price) without effecting the functionality you are looking for. Your designers didn't do a bad job, but we have more than 50 years combined experience designing for slide-forming machines. With our specialized knowledge of design for manufacture, we can generally suggest details that wouldn’t occur to someone deeply absorbed in the “big picture” scenario. These issues include shape changes and material substitutions.

Quantity - the biggest single factor

Graph of Price Sensitivity to Quantity

In our business, the biggest determiner of price is quantity -- for two reasons. The first is raw material price.

Because our parts are small, we order raw materials in what our suppliers consider small quantities. 20,000 parts may only be a few hundred pounds of material. In order to make precision parts we need precision rolling and slitting. Setting up a slit line to high accuracy is a long and painstaking job. All that setup for a few hundred pounds results in a high raw material price.

Secondly, our machines take time to set up accurately. Once set up, they make parts very quickly. Depending on the part, we can make 25,000 to over 100,000 parts a day.

Clearly, if you only order 20,000 parts at a time, you are paying a high setup price spread across relatively few parts.

Blanket purchase orders

If you do use a fair number of parts in a year, you can order ahead (say) a year's worth of parts. Using a "blanket" purchase order, you specify your anticipated need for a year. We go ahead and purchase the entire amount of material, often under a similar purchase agreement from our supplier, getting a better price. We then run the parts according to your release schedule and sandwiched in around our other work, either all at once (for smaller parts or quantities) or several times spread throughout the year (for larger parts or quantities). You then take the parts in smaller, more manageable deliveries or releases. Our price is a little higher than if you took the entire quantity at once, because we have to pay all the costs of producing the parts long before you pay us. But if your annual usage is enough to get you out of the steep part of the volume versus price curve, this is usually an extremely effective price reduction strategy. An added advantage of this option is that you generally have parts warehoused with us to accommodate minor schedule changes (but we don't guarantee it -- that's another service).

Details

In order to set up a blanket purchase order, you have to have fair confidence that (a) your part will not go through any engineering changes over the life of the blanket purchase order, and (b) that you will use the quantity of parts specified within the time frame. We require you to buy all the parts within the time period, regardless of engineering or market changes, and we require wording to that effect on your purchase order.

Raw material purchase agreements

If you don't have a large predictable annual volume and if your material is expensive (or unattainable) in small quantities, this arrangement may help you. We purchase, for you, a larger volume of raw material. You get a price break on the material but not on our setup. This works especially well for specialty metals with very long lead times or volatile prices. The raw material variation in our price to you is frozen. You agree to take all the material if the part is discontinued or changed such that the old material can't be used. Again, we require the purchase order to contain this promise.

Family part co-ordination

If you have a number of parts that require the same or similar material, coordinating the ordering of those parts allows us to aggregate the purchase of the raw materials and save you more money. Sometimes, if the parts are similar enough, we can also schedule the parts together and save you money then as well.

Shipping co-ordination

If you get several parts from us, we can together co-ordinate shipments so that all the parts go out together. Usually, this saves you freight costs. We aren't privy to your shipping arrangements, so we don't know what costs you more or less, but usually grouping shipments saves money. We already do this to a limited extent; if we have parts ready for you, we will ship them as much as a week earlier to get them on the same truck as other parts also going to you. If you give us more explicit instructions about grouping, we will follow them to save you money.

Backing stock

Some of our customers have found out that their fool-proof inventory systems aren't. When they got there and the cupboard was bare, they paid for very expensive rush shipment of parts in small quantities as we struggled to rush new raw material in small quantities and high prices. Other customers have very unpredictable work loads, and find that they can't forecast their needs far enough in advance for us to build parts to their forecasts.

For both situations, the classic solution was for our customer to hold sufficient buffer stock in house. Management's desire to reduce inventory levels across the board has eliminated that option. One of our customers said, "Management lowered the water level on the river faster than we could remove the rocks in the river bed, so the canoes all ran aground." His management forced him to reduce his inventory levels faster than he could find the errors in his new inventory management system. He can't produce his products without our parts, so he was grounded.

For both of these situations, we offer a backing stock service. We warehouse your parts in our warehouse, and promise to keep a certain minimum in stock whenever you have outstanding orders with us. We also promise to resume running your parts (assuming your quantities are large enough that we run them several times a year) in enough time to replenish the supply before we ship the existing reserve to you. Essentially, for a fee, we take on the responsibility and costs of ensuring a steady, reliable supply of parts to you. This service usually amounts to about a 1% part price increase, although this varies according to the material, the desired quantity of backing stock and the bulkiness of the part. Please ask us for a specific quote if you are interested in this service.

Summary

The best way to lower prices on your parts is to have us help you with the design while it is still in flux. If it's too late for that, quantity is the next best way to lower costs. We will work with you any way we can, including long term purchase agreements, warehousing agreements, etc, in order to increase our run sizes and therefore the reduce the raw material prices and the part price to you. Give us a call; we'll be glad to talk to you about the specifics of your part.