Manufacturing Today

Value vs. Price

What do customers really want from their manufacturing suppliers? Contrary to common belief, it’s not necessarily the best price. Rather, what they want is reliability, responsiveness and, above all else, an overall cost that lets them be profitable and successful. Yes, there is a big difference between price and cost. Knowing that difference and using it to one’s advantage just might solve the entire problem that stems from both foreign and domestic low-priced competition.

By Douglas DeRubeis

Product vs. Solution
As long as a job shop manufacturer’s customers are entrenched in a mindset of buying components or machines, they are price sensitive. That mindset is created by sales techniques that sell the features and benefits of a product rather than a solution to the customer’s problem. The part may fit well, or the machine may cut a percentage of labor, but their benefits and features are tangible, which means customers can compare them among competitors. That’s why customers who buy products because they are the biggest, brightest or fastest are easily picked off by lower-priced competitors, domestic or foreign.

Solutions-oriented manufacturers, on the other hand, seek a competitive advantage. They listen intently to what their customers want and then find a way to provide just the right solution to the customer’s problem. Although many companies today use the word “solution” as a euphemism for a product, machine or IT system, few have actually listened to their customers to discover the problem the solution is supposed to solve.

Manufacturers who create a solution, without ever understanding the problem that solution is supposed to solve, are only creating an "event," to use the terminology of Business Think: Rules for Getting It Right – Now, and No Matter What, by Dave Marcum, Steve Smith and Mahan Khalsa (Wiley, 2003). "A solution is worthless unless and until it creates business value – until it prevents a problem or invents a new result the business needs," state the authors. "Otherwise, a solution is merely an event." One might also say that a solution that is offered without knowing the core problem only treats symptoms, leaving the customer stuck with the problem.

So what does a specific customer really need? The only way to find out is through a coordinated and well-thought-out set of questions. What need is not being served in the current marketplace? What is the customer’s unique problem? Is it cash flow? Profitability? Poor-quality parts? Late deliveries? How could a supplier help solve that problem? What systems need to be implemented to fulfill those needs? Only when the specific problem is identified can the supplier approach the customer with a targeted solution and prove the overall cost of the solution is lower, regardless of the price of an individual component or machine.

Paying Less by Paying More
In the bestseller Blue Ocean Strategy: How to Create Uncontested Market Space and Make the Competition Irrelevant (Harvard Business School Press, 2005), W. Chan Kim and Renée Mauborgne list six assumptions that keep companies from breaking out of the boundaries of competitive convergence.

One is to "define the scope of the products and services offered by their industry similarly," and another is to "accept their industry’s functional or emotional orientation." Applied to manufacturing, most job shops play in the same tight arena of giving a customer a price break for ordering a certain quantity at a given time. But look at that offering from a customer’s point of view. On a per part basis, the price might be attractive, but on an overall cost basis it may not be so. For starters, to order the large quantity, the customer has to tie up money. Then, while the parts sit in inventory, they may become obsolete, or there may be an engineering change, and the parts must be scrapped. If nothing else, having that large inventory ties up capital which prevents the customer from taking advantage of other opportunities. Or, in order to purchase that large quantity, the customer has to borrow money from its line of credit and pay interest in addition to losing the availability of capital.

Wouldn’t it make more sense for the customer to pay a little more per part, but take delivery of just the right number of units per week? It would free up the customer’s cash for other opportunities and leave its line of credit untouched. Also, when an engineering change is made, no parts are scrapped because the last shipment can be quickly used up. The bottom line is that the cost per part – after taking into account scrap, cost of money and opportunity cost – actually is lower than the cost per part of the bargain price of a large order.

The same system works for selling machinery. If a manufacturer can demonstrate the utilization of its machinery will increase the customer’s capacity so it can become more competitive, then the machine is more cost-effective because it reduces the cost of production. Price becomes irrelevant. For those customers who cannot afford to buy a machine outright, it may be offered on a per use basis. Again, it’s a solution that focuses on solving a customer’s exact problem rather than selling a product. Customers simply don’t care about how much effort or money a manufacturer has invested in a product. They only care about the product’s benefits and how it solves their problems.

It all comes down to changing a customer’s mindset to focus on overall cost rather than price. The only way to do so is to develop a competitive advantage that is difficult for the competition to follow. A manufacturer who keeps customers in the mindset that they are purchasing parts will never have that edge.

True Value
The question is, how easy is it to change the mindset of customers? Will they listen? The answer is relationship selling. The salesperson takes the time to build a relationship with the customer, truly listening and understanding its needs and problems, and then working with the customer to develop a targeted solution. The focus is always on the customer rather than the supplier or its product. Relationship selling forms a bond between customer and manufacturer that no competitor can break, no matter how low its price. That’s the way to differentiate oneself from the rest of the pack.

Fortunately, it is not necessary to create a totally unique solution for every single customer. Actually, the needs from customer to customer within a marketplace in a geographic region are usually quite similar so that a product offering can be created to fit a large customer base. The value of an offering, however, is always based on how customers perceive the fulfillment of their needs so they can be profitable.

Make Your Customer Profitable
Too many businesses believe the only way to compete is on price. That kind of thinking is an invitation to lower-priced competition, particularly from other countries. If U.S. manufacturing is to survive, it’s essential to shift thinking from a focus on product to a focus on solutions.

Douglas DeRubeis is consulting services director with IPA. IPA and its related companies provide comprehensive business consulting services and business valuation services to companies in the United States and Canada. For further information, call 847-495-6786 or visit www.ipa-iba.com.