Low price, great! Is it a real price?
If you have ever sold a product to major retail you will know the price point pressure that they put you under. You head into the meeting with a price that you think is very reasonable, that the market will easily bare, a price point that is a real winner designed to sell a lot of product. Then the retail buyer says “we need a FOB China price that is 30% lower, that can still match all of our supply chain compliance guidelines, and comply with our factory audit requirements.”
Once you have been through a couple of these meetings you know what to expect and adjust your own profit expectations accordingly. It is this market price point pressure that makes us all fight hard to find the best price so our projects can succeed. Even when we find a good price, if we keep looking we can almost always find a better price. But is that better price a real price? Is it a sustainable price? Did we qualify that price properly or did we just get excited because it was a great price?
A number of years ago I was selling a product to a major retailer, a product that had injection molded parts, standard stock components, and CNC machined parts. The BOM had about 78 components so a lot of different suppliers to quote and qualify. The injection molding was easy to price as we had existing partners and knew injection molding pricing well. The stock components took a bit of work finding various suppliers that had decent quality and a competitive price but it was still not too much work for our team. The CNC machined parts were highly specialized and it took myself and our team about 4 months travelling all over China to find a supplier who could meet our price point needs, massive capacity and lead time requirements. Plus this NEW supplier had to pass a factory audit and all the supply chain paperwork that came along with selling to this major retailer. A lot of suppliers said they could help us but in the end, we only found 1 suitable supplier and 1 back up.
We had the price we needed, we had the suppliers we needed, it all felt right, so we committed to the purchase order and started production. Everything was great until it got close to the factory audit time for our NEW CNC machining supplier. We knew it was coming and we had prepared for it but I like to do a little extra preparation to make sure there are no last minute surprises so we took a 400 km trip to this specialist supplier. During our run-through for the pending factory audit, I noticed that one of the key parts they were making for us was missing, after about two hours of “where is this part, show me this part, the factory audit company will ask where this part is”, our supplier finally drove us away from their facility to where this part was actually being made. My heart almost stopped. There was zero chance that this outside supplier would pass a factory audit. Zero. Which would mean the order could be cancelled (or worse) and we could potentially be wiped out. So, time to get creative. We grabbed as much of this part as possible and ran it back to the factory that was actually getting audited. We staged it as best we could and we hoped for the best.
In the end, we passed the factory audit but only because the 3rd party factory auditors were sloppy, we got lucky, we almost lost big time. It certainly helped to be there during the factory audit to distract the auditors at timely moments 🙂
After we fulfilled the order we took time to reflect on the manufacturing process and pricing, to review the good and the bad so we could better prepare for the next production run. Our conclusion was that we did not have a real price from our CNC machining supplier, we had pushed them too hard for a lower price and as a result of them wanting to win the business, they outsourced a key component to a cottage industry style supplier.
Although I was thoroughly ticked off at our supplier we got together, had some beers, sang a few Karaoke songs, and worked out a go forward plan to move that “missing” part in-house for manufacturing. It cost us a bit more moving forward but we now had a real manufacturing price and still had enough profit to make the project viable. We learned a lot from this situation, we learned that we did not understand the true cost of specialized machining, that we too easily accepted the lower price and did not qualify the low price properly, and that we need to (at times) accept less profit to ensure overall project success.
Low prices are great, but if the price is too low you will likely have a supplier that can never pass supply chain compliance or the factory audits needed for major retail product placement.