Five Questions to Ask Before You Run off to Re-quote
Today, I’d like to talk about when it is prudent to poke the tiger, so to speak. During a client visit a few weeks ago, I learned of two situations the company had experienced involving re-quoting parts with the supplier. Although the situations were similar, they resulted in two exactly opposite outcomes – one happy, one sad. The happy situation went like this:
We had the big casting on a housing of our product. One day we were talking in passing about how this casting cost us $500. One of our machinists overheard us and his eyes popped open. He exclaimed, ‘$500! That is only about a $100 casting!’ So, we made a very gentle inquiry of the supplier about this casting’s cost, and before we even mentioned shopping the part, they had dropped the part price to $150. On one hand, we were happy, but on the other, we wondered, were these guys cheating us? How many other parts like this were in our bills of materials?
Later that day, I found out about the sad re-quoting situation:
We were trying to find savings on a bucket of parts and thought we had an interesting design change that could lower cost. Our supplier was happy to recalculate based on the design change as time had played a role in the price of parts. He said, “I think that there will be a $14 per part savings for the design change, but this part was quoted five years ago and the material cost and our costs are now higher. The increase is over $20 on old design and $15 on the new design. I’m sorry for this, but we have to ask for a price increase, because we are upside down on this part.”
These situations highlight a lot of latent problems, forcing me to ask:
- How did a $150 part get through quoting at $500?
- Why was material cost not indexed on these parts, so that the OEM and the supplier were protected and unsurprised by raw material price changes?
- Is the spend reviewed on a regular basis by a spend analytics tool that looks for outliers (positive and negative)?
- Etc. etc.
These answers to these questions are beyond the time that we have today. What this company needed in both situations was a good, speedy, should-cost process and a tool to support their quoting, re-quoting, and re-design processes. However, there are a few things that this company could have asked immediately (without a should-cost tool)? The following five questions are a powerful and fast filter to determine were a company should look deeper into re-quoting or not.
- What is the change in raw material price from the time the part was quoted – You know when the part was last quoted, its composition, and mass. It’s even better if you know the portion of the Piece Part Cost that comes from raw material, but you don’t really need it. There are paid sites such as American Metals Market, MetalMiner, London Metal Exchange, and Plastics News that calculate materials pricing. You can also access free data from the US government at the Bureau of Labor Statistics. Look up the price of the materials on the date you last quoted and today. Take the part mass and calculate what the difference would be. Then you will be able to avoid poking the tiger of asking for a re-quote when the cost of the raw material has risen significantly (as we see in the second situation above).
- Was the part quoted in a bundle or individually? Parts that are quoted in packages and bundles typically have less precise pricing from the supplier than individual parts. The supplier will want to make money on the bundle and may not put in that much effort to see that they are making appropriate profit (not too high or low) on an individual part. There may be more opportunity on a bundled part than on an individually quoted part. But, beware, you risk ‘cherry picking’ the part with the supplier and damaging your relationship with them. Also, you should check whether your contract on a bundled part even allows you to re-quote an individual part, or only the entire bundle.
- What is your buyers relationship with the supplier? – Although business is business, people still buy from people and make decisions in a way that is not always wholly rational, i.e. goodwill and bad will matter. If you are dealing with a supplier whose relationship is rocky with your company, make sure that the amount of money you think you will save on your part is worth potentially souring the relationship. Conversely, your part may become a battlefield where the buyer and the supplier fight out an existing cold war that has been brewing between them. Your part may get punished for reasons that have nothing to do with the situation at hand.
- Do a simple cost/mass spend analysis on Piece Part Cost of that commodity – Pricing and cost are not precise sciences, but they do follow general trends. You don’t have to do a full and fancy spend analysis, but you can do a back of the envelop spend analysis that will point out the big opportunities and risks. All you have to do is ask for the costs and masses of 30 -50 parts of same type of commodity that you are interested in re-quoting (e.g. castings, forgings, sheet metal, etc.). You should be able to export this info from your company’s ERP, MRP, SRM, etc. system. Just graph the cost versus mass and graphically consider if there “looks” like there might be an opportunity. This simple method would have prevented the first situation described above.
- Do a simple cost/mass spend analysis on the non-raw material costs portion of Piece Part Costs of that commodity– This method is a little more fancy but can highlight outliers a little more accurately. Remember that you already have a raw material cost approximation from the first question. Just calculate the Non_raw Material_Cost = Piece_part_cost – (CostCurrent_Raw_material_price * Part_Mass). Graph the Non_raw Material_Cost versus part mass (like we did in 4). Once again, look to see if your part of interest is or is not an outlier.
The great thing about suggestion 4 and 5 is that once you have done the mini-analysis for a commodity, other parts in the that commodity can be compared quickly.
To re-quote or not to re-quote – that is the question. Hopefully, the five considerations explain here today will help you answer that question a little more confidently.
As an aside… I was having trouble when researching this subject beyond my knowledge on the web. I.E. I could not find other articles on things to consider before asking for a re-quote. Does anyone know of articles that are relevant on the net, or is this only covered in books, or the tribal knowledge of gray haired purchasing agents?