DIFFERENCE BETWEEN AN OPEN-BOOK SUPPLIER AND AN ALL-SECRECY SUPPLIER
During the many years I’ve worked for Purchasing I have seen 2 main types of suppliers with respect to their cost transparency. It would be easy to say that these two types are the all-transparency, open-book companies, and the all-tight, sorry-but-we-don’t-share-that-info company, but there are different shades of grey in between. In general, all companies have a know-how that they must protect, so it is understandable that they might be eager to disclose how they manufacture their product and how much it costs them, with too much detail. Even with Non-Disclosure Agreements in place, some companies are worried that part of their know-how might be slipped into a competitor and therefore might lose the technical advantage they started with.
Now, having said that, there is one factor that we all must take for granted, and this is TRUST, and in BOTH directions, as we also don’t want our suppliers giving details of our product specifications to our competitors.
Trust, honesty and business ethics are in ourselves and we would not be doing this job otherwise, and our suppliers would not last long in our supply list if we found out they weren’t honest either.
So, with the honesty taken for granted, and I will not go over this point any more, let’s see why being cost-transparent with our suppliers and customers can only bring profit for all parties:
- There is nothing to hide. This is the process and this how the price is calculated.
- If there is a change in the specifications, the changes in the process can be detailed and demonstrate how it affects its cost
- Everyone must make profit, which should be listed, and no business should be awarded if the seller is going to lose money. No excuses.
- If during a bidding process a price is quite lower than the rest, it is necessary to understand why. In this point, some companies will claim that they have a special and innovative solution. Well, this is great, but we must confirm it is technically feasible and cost effective.
- Margins and overheads vary slightly among different companies. If a company has them too high, it’s acceptable as long as the other costs compensate for them, otherwise they will not be competitive. The profit level target has to be respected, other overheads could be discussed, up to some level.
Finally, and most important, which company do you think will be approached first for new projects, for technical and cost information support? Of course, those who are transparent in their discussions and that we are confident in their know-how. This early engagement with the product will benefit us for establishing price targets, and also this “partner” company as they will have a better knowledge of the part if it finally makes it out to sourcing process.
But, on the other hand, let’s imagine a “super-company”: latest technology, best quality, not sharing any process or cost information at the time of bidding. 2 possibilities in their quoting: a competitive price, or a non-competitive price:
- Non-competitive quote: Since they don’t share their breakdown, we don’t know why they are expensive, we suspect it is their margin, since they trust their reputation and think that their option will be the safest for the customer in terms of quality and quantity. We can’t help them, even though we would like to work with them because of their technical reputation, there are no clear items to discuss and bring their price to more competitive levels. The only possibility for the buyer is the traditional “your price is too high compared to the others”; this might work if finally they lower their price and provide a competitive quote…
- Competitive quote: Depending on the complexity of the part, we must know how they can provide that price as we know they have expensive equipment and people. We can do an exercise of trust and award them, and we will find later (we always find out at the end) that the product is at loss (expect a price increase request soon), or that they indeed have found an innovative and cost-effective solution.
So why didn’t they share this solution from the beginning? It would have gained our trust and admiration, and they will be the first ones to be consulted for the next project! Was it because their margin was too high? As said before, we respect each company policy, and sooner or later the cost engineers will be able to make their own analysis of the suppliers process costs, especially when the product is in series production.
You may think that this last example can justify not being transparent. Well, it may, but what if it was the other option, that they were in loss? Why not sharing from the beginning and earn each other’s trust and admiration if they had this new idea, and work together to make it profitable for this project and for future ones?
I don’t want to finish without mentioning that there is a third type of company, fortunately in extinction in the Automotive industry, the “whatever-you-want-to-hear” company. They will provide a price breakdown made up to justify their price. Needless to say, this is a short itinerary, any experienced cost engineer will detect the flaws, and if not, any future assessment of the line will bring out the reality of the processes.
From my own experience, I can say that it wasn’t easy to have our suppliers share their costs when I started in Europe 15 years ago. But most of these suppliers share now as they realize they want to show their capabilities and have nothing to hide, and with exceptions (there are always exceptions), these suppliers have remained with us whereas others, always reluctant to share costs, have been replaced for one reason or another. I still amuse myself when I find companies who refuse to share their price breakdowns… what do they want to hide?
If you have questions or comments, please let us know.