Customer Pricing Issue
A small $15 Million automotive parts and manufacturing company had over 20 years of profitable history in a quiet USA town. The products were relatively simple stamped steel parts that were welded with minimal automation and produced in relatively high volume. This small company turned from historic profit to monthly losses of about 5 percent of sales. Management was shocked, in disbelief and uncertain as to how to proceed to turn this trend around. However, corporate management was not willing to accept the losses. An analysis of the quote process and manufacturing flows identified the issue. A major new $4 Million contract had started and had been seriously misquoted by:
• Basing overhead on labor time when this new robotic work cell did not carry its fair
share of cost since it had virtually no labor.
• Activities (such as JIT and line sequencing) were not included in the quote costs.
The project team worked with the customer for over six months to turn around this loss-producing contract. The customer’s buyers and engineers were invited to offer advice and support. Several cost reduction alternatives were implemented. During this time, the customer ran market tests to determine the price it would need to pay other suppliers. Through a negotiated settlement, a price increase of 20 percent was approved for the last three years of a four year contract allowing a return to profitability and, eventually, even more profitable business from that OEM customer.