Price vs. Cost

We have all been on the receiving end of a sales pitch that emphasized the concept of value to the customer. Although we know that value is important, few can succinctly define it and fewer still can quantify it. As a result, business executives need a more disciplined and innovative approach to defining and determining business value so that they can make intelligent business decisions. Original equipment manufacturers (OEMs) as well as systems integrators and all entities involved in the supply chain down to the end user need forward-thinking suppliers to reach their goals. The Trelleborg Solution looks at people, processes and products for a total value assessment to quickly achieve productivity increases, cost reductions, quality improvements and new innovations. This translates to tangible business benefits.

Assessing Long-Term Value

One of the key decisions a business accelerator model can affect when a manufacturer makes a major investment is choosing between up-front price versus long-term cost from a supplier. Cost-conscious manufacturers tend to focus on the lowest possible up-front purchase price without significant concern for long-term value. Unfortunately, this traditional business model neglects to consider benefits such as increasing productivity, better efficiency in their manufacturing processes, reducing the overall number of SKUs, reducing number of vendors, increasing throughput via lean manufacturing and technical reliability. Consider the example of a mid-market OEM exploring the idea of converting its mechanical system to a hydraulic control system to keep up with industry competition. If a supplier begins discussing the technical features of its upgraded system, the OEM might be intrigued but will balk at the cost of the hydraulic control system, which—for the purposes of our example—is generally two to four times greater than the mechanical system. However, if the supplier can explain the value-added benefits, the OEM will realize that, by using the new hydraulic system over the mechanical one, certain benefits—including improving throughput and machine reliability, reducing the number of extraneous components and opening the door to new customer markets—validate the choice to select a total value of ownership (TVO) strategy over the lowest price. Choosing to purchase the lowest priced material in the short term may mean you are underestimating the long-term associated costs. Some related costs may not be reflected when managing more SKUs and inventory of parts. For instance, this point becomes apparent when a company has to use multiple vendors and manage the logistics and supply of many part variations. The TVO model allows for the use of multiple variations but with just one product and one SKU, which streamlines engineering and manufacturing processes. Several analysts contend that the total cost of ownership of most capital equipment purchases increases substantially if the equipment is selected based on initial price rather than the long-term cost. Several studies from ARC Advisory Group determined that nine times out of 10, the better choice for an OEM is to evaluate long-term value in the form of better service life, which leads to less downtime, lower maintenance costs and better reputation with end users. This is especially true when evaluating this decision’s impact throughout the entire supply chain.

The Framework for Rethinking Profitability

The business accelerator model supports all of the constituents involved throughout the entire process—from the choice of materials to the design process to manufacturing. Purchasing and supply management that have traditionally focused on price are starting to take heed of a bigger value proposition and a more holistic view of their materials purchasing and supplier selection criteria. The business accelerator model helps companies rethink profitability and how to achieve it. Designed to provide a deeper understanding of the value a supplier can offer to impact the entire supply chain, this model has proved to have revenue-enhancing effects on its customers’ business. The approach captures total cost considerations as well as performance advantages and embraces a manufacturer’s need to reduce the overall business costs and bring finished products to market. It was developed from the concept of the value of a true partnership, which touches on the total value of ownership (TVO) and ends in a conceptual framework to benefit OEMs. The supplier and manufacturer relationship is a critical component, and this framework provides direct manufacturer support, which eliminates the need for a middleman. The framework factors in the condition of the facilities—whether or not state-of-the-art equipment and test facilities are available to produce the materials required in the design. In fact, product design decisions greatly impact the end result’s success or failure. This is becoming even more relevant given the increased emphasis on manufacturer value-based market offerings, both from the supplier and the customer point of view.

OEM and Supplier Information Sharing

The concept of value of an offering is often considered as important as the value of a relationship. According to the ARC Advisory Group, a relationship has value for the business executive for two reasons. First, exchanges between the supplier and manufacturer become predictable and reassuring because both supplier and manufacturer have learned how they each organize their business operations. Second, the interactions and knowledge sharing often lead to new product or service solutions. This is why the model begins at the base level design of the materials for the benefit of the OEM, machine builder or device maker. Sharing knowledge makes for more efficient supply chains (with lower costs and quicker speeds) and more effective organizations (with higher quality outputs and enhanced customer service). ARC Advisory Group studied how knowledge sharing can enhance the performance of partnerships and build stronger supply chains in the global marketplace. They sought to understand not only which companies benefit from cross-border knowledge sharing but also the conditions that lead to knowledge sharing in global supply chains. Many people see knowledge sharing as the result of customer or supplier needs when, in fact, it is more likely to be influenced by market structures or organizational similarities and dissimilarities between manufacturers and suppliers. Creating a collaborative environment can create more agility, adaptability and alignment, which is possible only when partners promote knowledge flow between the highest areas of impact within the supply chain. In other words, the flow of knowledge is what enables a supply chain to come together in a way that creates a true value chain for all the stakeholders. Knowledge flow creates value by making the supply chain more transparent and by giving involved parties a 360-degree view of customer needs and value propositions. Increased demand visibility can provide such benefits as a better understanding of market trends, better product design, planning and development.

Lean Manufacturing to Increase Throughput

All lean improvements result in increased throughput of goods. The greatest culprit in reducing throughput is waste, which can translate to machine downtime, lost time waiting for materials, out of stock supplies, operator errors and poorly designed processes. The business accelerator model delivers lean improvements that result in increased throughput for an OEM or component manufacturer. It supports a leaner environment because of its unique design, which decreases the need for product variations in inventory, simplifies logistics (less SKUs to manage) and delivers quality, flexibility and modularity. The solution provides improvements that have a direct cumulative effect on overall throughput.

Bottom Line Results

Long-term value has little to do with the lowest price and everything to do with the way the purchase allows the customer to modify business practices and processes for overall efficiency. As previously described, the model has been built to reduce overall costs and reach the objective outcomes:

• Meet or exceed current product performance
• Incorporate base level design
• Product coverage for all application conditions
• Reduce overall number of SKUs
• Reduce number of vendors
• Increase throughput via lean manufacturing
• Supply chain advantages and savings
• “Shoulder to shoulder” design and testing

A supplier’s track record is earned in part based on additional services and solutions that lower a manufacturer’s costs and deliver bottom-line results. Furthermore, suppliers must identify real needs only when they exist and address them with appropriate solutions. This requires a true understanding of customers’ needs. Then, they must identify issues that fall within the realm of the supplier’s competence so they can achieve desirable results. Suppliers should also streamline business operations and collaborate with customers to identify areas throughout the organization where they can offer better materials or execute a value-add service that will improve performance and efficiency. Examples of such strategies could be advanced delivery services, inventory management and stocking programs. This allows the customer to focus on their core competency. Suppliers who go beyond to help their customers succeed will help win new business. Ultimately, solutions and services should help customers improve their product development cycle and reduce their cost to design, develop and deliver, while bringing greater value to the end product, attracting prospects and increasing the sales of the component manufacturer. For example, helping customers with a product standardization program, which is one of the model’s aims, can help customers become more flexible and responsive to their market dynamics and improve their manufacturing efficiency. These efforts will reduce their costs while helping to expand their customer base and position the component manufacturer as a leader in their market.