As the US and Europe continue their economic recovery (albeit slowly), this time around, OEMs (Original Equipment Manufacturers) want to have more insight into their supplier relationships. Even though we have seen a cost focus from the automotive OEM for decades, more and more OEMs in the overall manufacturing sector are focusing on developing "strategic partners".
So what does this mean?
Strategic partnership certainly sounds like a two way road, benefiting both participants, yet our gut feeling might tell us otherwise. Although there certainly are significant benefits of being labeled a strategic partner to a large OEM, we have to be prepared to make sure the reciprocal relationship continues. Today's OEMs have no qualms about asking for complete set of financials of privately held companies, they have no issue with naming their own price. So there has to be benefits, otherwise no one would participate. Generally, as a result of the smaller pool of vendors, strategic partners reap the benefit of higher volumes and being the designated supplier of defined products (designated for new product and new line launches). The benefit to the OEM is a reduced cost.
If the OEM emphasis is only on cost reduction, each partner must understand their costs very well. Here lies the dilemma. What should be provided to the OEM? Too little and the company runs the risk of losing the relationship, too much and the company risks going out of business.
In many engagements, we encounter a rather unsophisticated method for quoting and pricing goods and services. Once a customer requests support for a given quote, there is a mad scramble to figure out how the company can justify its cost rates and prices. And that's a poor approach. We should know what each product we sell costs, how volume changes profitability, how underutilization of assets impacts unit cost and how labor efficiency changes capacity. Generally, the company should be making products in a most efficient and cost effective manner. Management needs to understand its product mix and its cost drivers. Only then a thought-out decision on pricing and reasonable negotiations with the customer can be completed.
Even if your customer hasn't knocked on your door yet, a savvy business owner must know what it costs to make their products. Sometimes "back of the napkin" calculations work, but for more complex processes and multi-activity operations, a properly documented cost model is more appropriate.
You're Invited! Annual Not-For-Profit Accounting Update
Thursday, September 26, 2019
Hosted at Detroit Historical Museum
Middle Market Manufacturing Outlook
Wednesday, October 23
Hosted at the Detriot Athletic Club
7:30 AM - 11:30 AM