Evaluating the Offering

Evaluating the Offering

The inquiry examples for production equipment in Chapter 2 draw responses that can vary for content and concept all over the map. The buying organization’s evaluation and recap of the various offerings must be summarized to provide focus on the bottom line--in other words, the cost effect on the product to be produced over the life cycle of the product. It is a given that before getting that far, the approaches being considered are viable and capable of producing pieces to the required specifications at the required rates.

Initial purchase price is a major factor and the most visible one, but by no means the only one. Typically, budgets for capital equipment purchases are established for specific new product programs. The path of least resistance for evaluators is to use initial price against budget numbers as selection criteria without a realistic value put on operation and other factors.

There are several other factors that have a cost impact on the parts to be produced: the ongoing cost of perishable cutting tools and their holders; the frequency of and time to change tools; the cost of other perishable components; the number and type of operators required; the hardware and software robustness (reliability/maintainability); projected preventative maintenance and repair costs and downtime (lost production cost); floor space consumed; material handling; and loading and unloading requirements. The cost of these factors plus the equipment purchase price and its installation costs translated into cost per part produced over its forecasted production life is the real bottom line for comparison. All of these factors can vary widely in the various solutions offered.

It’s possible that one supplier can offer a viable approach with the least hardware and thereby, it is the least expensive alternative initially. However, the other factors in their operation could make the parts produced more expensive than that of a more expensive initial purchase. It is difficult to comprehend how the auctions that are currently being used can properly consider all those factors.

The Suppliers’ View

A special machine tool company reacting to an inquiry may decide on its response as follows:

  • Does the inquiry fit our profile?

  • Is it a customer that we can relate to?

  • Is it a production part that we can comprehend?

  • Has a reasonable time line been provided?

  • Are the production part tolerances and the acceptance criteria realistic and achievable?

  • Does a resulting order fit a specific space in our backlog satisfying the prospective customer?

  • Who are the competitors and what are their strengths and their backlogs - are they hungry?

  • Are the competitors recognized for their experience in production of this particular part in comparison to us?

  • Are the competing companies likely to use a traditional approach?

  • Are there other factors involved, such as; is this a new customer that we want to impress for the future; or a new product to be produced that will provide an advantage for the next time?

  • Is this customer really interested in the best approach or is he just looking for the rock bottom lowest possible initial price, wasting our imagination capital?

The people in any organization that are the imaginative stars are a finite resource and are carefully assigned to important prospective opportunities. To use that invaluable resource on a customer project that will not fully consider the unique content and its real value or in a situation where that content will likely be disclosed to competitors prior to any commitment makes no business sense. Do you suppose that those buyers have thought this through, or do they care? The low price auction and the culture of Yankee ingenuity are incompatible!

In other words, can we and do we want to win this order? We can accept the inquiry and agree to provide a quotation, or decline to quote the inquiry.

Inquiry accepted and the quotation process follows:

  • Establish concept to be offered. This is when the imagination contest occurs – to secure a purchase order against clever and aggressive competitors.

  • Establish selling price

    • Standard formula?

    • Inflate for negotiation (auction)?

    • Under formula for competitive position?

    • Over formula based on the perceived value of imaginative concept chosen to be offered?

It is surprising to many that normal formula pricing for the American special machine tool industry puts profit in the 5 percent of the selling price or less - after all costs, but before taxes- range.

On a level playing field, special machine tool companies that are part of larger and diverse corporations are less likely to participate on the same competitive plane as privately-held companies, even though passionate and knowledgeable people may manage them. This is primarily because they are subject to the close scrutiny and the business practices of the corporation and perceived stock price influencing factors. They may not have the freedom to compete head-to-head against freewheeling, independent companies on landmark projects.

A board of directors representing typical investors, institutional and otherwise, will not always be sensitive to or have sentimental feelings about a business that isn’t consistently living up to minimum financial performance standards. As in some examples cited earlier, it is possible to ride out several years or several rounds of competitive exercises, winning some and losing some, but sooner or later a pattern develops and impatience at the corporate level causes changes.