Progressive Distributor - Purchase price doesn't equal cost

Purchase price doesnt equal cost

A low purchase price may be alluring, but thats not always what sells cutting tools, abrasives and other metalworking components.

by Matt Carlson

The corporate bean counter hasnt vanished. However, at some manufacturing companies with metalworking operations, the bean counter may look beyond his ledger to see the plant floor and a bigger picture. Even better, at some shops, purchasing decisions remain swayed or managed by engineers and managers who appreciate the overall manufacturing processes.

The result: Distributors that can demonstrate how their metalworking expertise will lower overall process costs or improve throughput and efficiencies are increasingly winning business.

One of the things we try to do every day is optimize the uptime of our customers machines, says Allan Chartier, president and CEO of Midwest Industrial Tools, Omaha, Neb. Were never going to give up trying to show customers the difference between unit purchase price and real cost. Were strong on teaching buyers to purchase value.

But according to Chartier and many other distributors, the concepts of selling true cost vs. invoice price remains an ongoing battle.

There are three types of buyers out there, Chartier says.

First, theres the buyer who is graded by his boss on how much or how little he pays. Then, there are purchasing agents who understand that if they pay a little more, they may get much more productivity from a product. Finally, there are engineers who understand value.

Engineers will buy based on productivity, Chartier says. About 50 percent of the purchasing agents will do this. The buyers wont. To them, everything is just a commodity.

Despite fewer resources, small plants and shops often are more receptive to more expensive tools that increase productivity and payback, he adds. When the purchasing agent also is running the machine, he understands the value of a product.

According to distributor engineering salespeople such as Bob Berlocker of Cleveland-based J&L Industrial Supply/Strong Tool Company, purchasers must realize that cutting tools and abrasives are applied, engineered products, not just commodities, regardless of the quantities ordered.

Youre selling sophisticated tools for sophisticated processes, he says. These are not commodities; these are engineered products that evolve. If a manufacturer is using the same processes, cutting tools and abrasives he was using four or five years ago, hes probably in deep trouble somewhere.

Paul Kieta, manager of distributor and sales programs for Carboloy, a Warren, Mich.-based cutting tool manufacturer, believes this war is being slowly won.

Most customers realize that, even if a product line seems more like a commodity in nature, the real value in a product is the way its applied, he says.

In turn, that means distributors must commit to a more sophisticated sales approach.

Consulting engineers
Were trying to be consultants on the floor with the customer, explains Sam Mitchell, president of IDGs Blackstone Company, a distributor headquartered in Memphis, Tenn. Its a different job now. Were analyzing the entire process as well as suggesting tools that perform better.

Increasingly, metalworking customers are looking to distributors to help them find ways to better apply cutting tools and abrasives to boost productivity in one form or another.

Theyre looking for partners to make them more efficient in an increasingly competitive market, Berlocker says. The long-term focus is on more than channel cost and price.

He cites statistics showing that cutting tool costs make up less than 4 percent of overall product manufacturing expenses.

Say we could, hypothetically, eliminate the cutting tool budget for a customer, he says. How would that affect the end price and competitiveness of a manufactured product? Probably not enough to greatly impact its final price.

So how much would a customer really gain by reducing a tool budget by 10 percent?

It might make more sense to look at what could be gained by increasing a tool budget by 10 percent with the right products to increase productivity.

You need to look at the big picture, Berlocker says.

Weber Supply. Inc. of Kitchener, Ontario, attempts that with many of its customers. For instance, in working with one firm, an aerospace concern that manufactures turbine blades, Weber suggested new grinding wheels that cost $90 instead of $60 each. The customer, which uses 490 wheels per year, incurred an overall increased grinding wheel cost of $14,700 annually.

However, the change significantly boosted the companys productivity and revenue. The manufacturer was able to produce 6,000 more finished units per year at a sales value of $90 each. The production cost per unit was $50. Given the profit margin of $40 per unit, the overall annual profit gain was $240,000. Return on the initial investment was more than 17 to 1.

The new grinding wheels also led to fewer required dressings and other lower process costs that saved the customer an additional $4,750 annually.

Our district sales manager carried the ball for this, says Dave Weber, president and CEO. Our customer was open-minded, and once they understood the numbers, they endorsed it relatively quickly. But we had to prove it with quite a bit of testing.

Other times, cost reductions come through the back door. As Berlocker points out, You might reduce yield on a cutting tool by 10 percent by changing it early. But, in turn, that might reduce scrap that results in savings.

Or, the distributor might be asked to help a customer simply increase capacity, even if the short-term financial equation doesnt lead to savings.

Increasing a tool budget over a short period of time may be more cost-effective than a capital expenditure, Berlocker says. These are the creative things we need to look at.

Still, retooling processes and workflows or even reorganizing the plant floor may be the best answer for some customers.

Chartier says Midwest Industrial Tools, which sells machine tools as well as cutting tools and abrasives, worked with a customer on a manufacturing process that required 8 minutes and 20 seconds. The customer wanted to cut turnaround dramatically.

Midwest Industrial Tools recommended a $2.3 million capital investment that included machinery, as well as cutting tools and abrasives. Once all the equipment was in place, the customer slashed production time for the parts to 2 minutes and 15 seconds. Measured in terms of productivity, the manufacturer recovered its initial investment in seven months.

Re-engineered sales force
Increasingly, distributors encourage productivity-oriented sales by changing the way they pay their sales forces. To make this possible, cost savings or productivity gains must not only happen on the plant floor, but also on paper. Improvements and measurements must be documented by the distributor and signed-off by the customer.

Part of our sales forces compensation is based on documenting value delivered to the customer, Weber says. Its not perceived as a bonus.

Shearer Industrial Supply, a distributor from York, Pa., has taken a similar approach over the past couple of years.

We used to compensate on a straight commission, says Jeff Darr, vice president of sales and marketing. Adds Andy Shearer, the firms president: But people will do what you pay them to do. We dont just want to take orders and sell goods. We want to bring value to our customers.

We recognized how we compensated our sales force and what our customers needed could be contradictory. The customer needs to reduce overall costs. But with our previous sales program, the incentive was to sell as much stuff as possible at the highest possible prices. Obviously, those two ideas were in conflict.

To make productivity-based selling work, distributors must establish benchmarks to legitimately compute the added value (preferably in dollars) that results from a sale or contract. Besides decreasing long-term production cost, customers might want to make parts faster. They might want to make parts faster without buying new machinery. They might want to increase uptime.

Weber Supplys approach, for instance, begins with a description of the value-added product and services. Then they compute total cost categories, such as revenues, expenditures and processes. Finally, impact points, or results, are explained.

This documentation also is critical to cementing long-term customer relationships.

In six months, the customer forgets about what you did and the guy you worked with may not be working there, Blackstones Mitchell says. If its not documented, you might lose the value you brought to the customer.

But sometimes, Mitchell admits, there may be no way to document long-term cost savings or productivity increases.

We might say using a new carbon insert can give you 1,800 parts, he says. But if the customer doesnt run a machine often enough, they might not be able to measure the benefit.

Educated sellers required
Theres more to this style of selling than an attitude adjustment and additional paperwork. Salespeople must increasingly blend hands-on and theoretical engineering expertise. For instance, Chartier, who also is chairman of the American Machine Tool Distributors Association (AMTDA), urges his staff of 21 sales engineers to continue their professional education by attending manufacturer-sponsored programs, as well as AMTDA and other industry sessions. Part of the process includes earning certified machine tool sales engineer (CMTSE) credentials.

In support of this approach, many manufacturers have aligned themselves behind distributors value-added, big-picture sales strategies.

There still are plenty of people out there who will buy the cheapest tool, but there are others who want to buy value, says Mike Wochna, president of Cleveland-based Melin Tool, a manufacturer of end mills. We like to align ourselves with distributors who sell well technically, but there arent enough of them to get enough volume. Thats why we also sell through other channels.

Cost savings and documentation have become an integral part of our sales process, Carboloys Kieta says. We have a large, technically qualified sales force in the field to support distributors in this effort. Most of our salespeople, which we call technical specialists, have come from manufacturing engineering and have manufacturing experience.

According to Kieta, Carboloy works with its distributors and their customers to create measuring systems and written documentation for value-added sales. These might examine cost-per-piece, throughput, reduced tool usage, tool change times and other factors.

And were constantly introducing new products to improve end-user productivity, Kieta says. We try to educate our distributors about these new products and their benefits through regular meetings. Then, our technical specialists work in conjunction with our distributors. Theyre expected to be on the plant floor with our distributors trying to generate cost savings for customers.

Whats the end result?

Progressive distributors that continually demonstrate their metalworking expertise and can document how they lower overall process costs or increase efficiencies for customers are winning business from less savvy competitors.