After submission of fixed price bids, a target price is established, lower than the lowest original bid, an arbitrary number. All acceptable bidders are then asked to meet or beat that price. Several rounds ensue, each at lower prices, until only one bidder remains. Final purchase order values can be a fraction of the successful bidder’s original quotation, which has become a meaningless exercise. The best technical offerings often are not a factor. The other factors in the offering that affect the life cycle cost of the product to be produced may not be factored into the evaluation. The bidders are seldom invited to explain, present, or discuss their offerings to those involved in the evaluation. The written bid on a very large and complex proposal cannot possibly cover all the fine points of the offer, particularly if it’s an imaginative fresh concept.
Imagine comparing bids that utilize dramatically different but effective approaches and then shaking down the bidders in an auction for the lowest price. One may obviously be better in the eyes of the engineer. He or she may not be willing to recommend the higher initial price, even though detailed study may show that the operation cost component offsets and even improves the actual total cost. Cost-sensitive management can be preoccupied with the very visible initial price readily compared to a project budget. The complex extrapolated total cost over the component life cycle can be a challenge.
The purchase price alone was more important than all the other factors including any thoughts of exploiting the culture of Yankee ingenuity for their own benefit.
The trend in some manufacturing industries has been to purchase entire process capability at one time, rather than as single process steps as it was done in the past. In recent history, entire machining systems costing $60 million or more and even multiple systems of that size are being purchased from one supplier to focus responsibility and to minimize coordination problems and staffing needs for the buyer. The special machine tool company’s ability to manage the capital requirements over the life of large projects has become a very serious problem.
Close relationships with banking institutions are essential, and the condition of progress payments from the buying company may also be required. Closely held companies are at a distinct disadvantage in this situation, as larger public companies typically have a greater resource base to manage this problem. In the case of foreign competitors, their bankers, customers, and governments have historically been more supportive than their U.S. counterparts.
The alternatives for private companies are to decline to quote the large orders, to consider going public, or to sell out to a larger company. Not participating in the larger projects sends a message to clients and to competitors that will lead to decline as the competing companies will grow and prosper and gain valuable experience and reputation. The smaller companies surrender as a major player. Is this what the buyers, beneficiaries of those imaginative technological advances, need or want?
All of the U.S. automobile companies discourage the progress payment option, and most absolutely refuse to consider them. If you accept the basic premise in this writing of the value of the subject industry to the automotive industry, the question of progress payments is a no-brainer. The selling price in a progress payment deal is always discounted for the cost of money. The pay back is invaluable. Other industries operate on the progress payment principle very effectively for the same reasons. The average homebuilder typically operates with progress payments, and you can be certain that builders of high-rise office buildings, bridges, and hydroelectric dams do as well.
Progress payments can substantially lower the special machine tool industry entry barriers, reducing operating capital requirements to help make possible new ownership blood.
Eli Whitney’s musket enterprise and the related development of the first special machine tools would not have been possible without both up- front and progress payments from the U.S. government. Who can say what delay in manufacturing progress and our “more abundant lives” might have resulted by denial of those payments.