Situation: A company buys several important components from a single US supplier. They are considering an offshore source for one of these components which makes up a large portion of what they purchase from the supplier. Does off-shoring make sense in this case, and how do they mitigate the risk? How do you change suppliers for a key product?
Advice from the CEOs:
The key consideration is the off-shore partner’s ability to reliably make the component at the price promised. If they can, why not outsource offshore?
The decision depends upon two additional factors: the amount that you stand to save by off-shoring your source, and the potential cost to you of inconsistent or unreliable components from the off-shore supplier.
If the cost of failure is high, a modest savings is less valuable. You may want to wait until you have higher volume and higher potential savings before looking at off-shore sources.
In the US, we assume – with some security – that a pilot run predicts a large run. Historically this has not been shown to consistently apply to offshore suppliers.
Can you afford to invest and potentially lose the amount that it would cost you to secure your first production order from the off-shore source?
If the answer is yes, invest the time and effort to visit the supplier, and secure resources to monitor their production – your own or a trusted partner’s. Your presence and interest are very important.
The principal challenge will be quality and consistency of raw materials, and varying age of production equipment used to produce your components.
Are you concerned that your current supplier might cut you off?
The CEO is not sure, but has identified this as a risk.
If this is the case, start now identifying second sources for other components made by this supplier – if only to keep them honest in price, quality and delivery.
Situation: A company negotiated a contract with a customer giving them a significant price break in exchange for a large committed order with extended delivery. The customer has now come back and requests additional time for delivery and payment on the order. The company has already procured extra material to produce the large order. How do you respond to requests for delivery delays?
Advice from the CEOs:
Response will depend on the company’s history with customer. In the case of a long term customer who pays bills it is best to work with them. Explore solutions to meet them half-way.
Ask for a new commitment to take delivery by a date certain. Request consideration in return. For example, request partial payment up-front to help cover the cost of managing the delivery delay.
Keep the conversation going. Don’t get to point where you alienate a good customer.
If the customer is newer with less history but good potential for future growth, also respond flexibly but ask for additional consideration in good faith to cover your additional costs. As in the case above, request partial upfront payment to cover carrying costs – maybe a larger payment than for an established customer.
If the customer has been difficult in the past, or has been late with payments then the situation is different. There is no assurance that the customer isn’t just gaming the situation. Because the company has already committed resources to deliver the large order, demand an adjustment on price and terms in exchange for the delivery delay.
Whatever the history and situation, it is important to emphasize that you want to work with the customer.
Situation: A company faces a difficult situation. One of their customers placed a substantial order for custom product a year ago. They have taken delivery of some product but the bulk of the order is still in the company’s warehouse. The company negotiated a cancellation fee with the customer, but they haven’t paid. What is the best option for the company? How do you deal with a deadbeat customer?
Advice from the CEOs:
Because the customer is unresponsive, be ready to take legal action. Get an attorney. The initial process to prepare for a suit may cost $5,000-7,000. Therefore be prepared to sue for damages plus legal fees, with the threat that liens will be put on the customer’s business during the settlement process.
Once everything is ready for a suit, talk to the customer – the message is either they pay in full what they owe or you’re ready to file a suit which will cost them much more.
The Uniform Commercial Code may cover you for custom product. Check this out. This is important so that the company won’t be exposed to a countersuit for filing a frivolous suit.
A route which may be less expensive is to hire a lawyer on a contingency basis. Contingency lawyers may want up to 40% of the settlement or judgement to take a case, and the value of the case has to be large enough to attract their attention.
Situation: An early stage manufacturing company has established repeatable operations that produce the desired quality. The CEO now wants to focus on efficiency. Early research suggests a number of areas on which they could focus. Based on your experience, what efficiency metrics are most important in manufacturing?
Advice from the CEOs:
Much depends upon what is being manufactured, and both the complexity and labor intensity of the manufacturing process. Start with the basics: looks for a relevant quality metric, and a time / delivery metric. Test these for relevance to your operations and adjust or change them as necessary over time.
Start with simple metrics and make them more complex over time.
On an ongoing basis, monitor your processes for continuous improvement. If an employee comes up with an improvement that increases efficiency and saves money, recognize and reward that employee.
Be selective. Limit your focus to 2-3 metrics per quarter. Make first period performance the baseline for the next period.
Areas in which to focus:
Statistical process control to monitor:
On time delivery to production schedule.
Quality check at end of production – yield rates versus pre-set targets.
Use Google to see what others are using. Google “Manufacturing Performance Indicators”.
As you develop your efficiency metrics, include your most effective metrics in performance measurement for bonus awards.
Situation: A company’s contracts are based on milestones versus time and materials. This is common for their industry. However, end products are poorly defined at project outset and product requirements frequently evolve and change, making milestones squishy. How do you negotiate milestone contracts and payment schedules?
Advice from the CEOs:
In addition to payment schedule, there are four elements to a project negotiation – specifications, schedule, project flow, and budget. Tell the client that to hit their budget target, they need to give you control of any two of the other three factors. This means that if they want to specify budget and schedule, then they have to yield you control of the specs and project flow. Any change to these means that they have to be willing to change budget and/or delivery date. Finally, to keep the project going on a timely basis, they must make milestone payments on time and on schedule.
Try to transform the project, as much as possible, to time and materials. Here’s your talk line:
To give you 100 hours of effort on a fixed bid basis, we have to budget 110. Time and materials, in the long run is less expensive because you only pay for what we need to deliver your product.
Your credibility to deliver on a time and materials basis will be based on past performance and the relationships that you have developed with your clients.
Milestone contracts are especially difficult in low margin industries because of project variability. One solution is to bid 130 hours cost for 100 hours work. The challenge is that this looks uncompetitive, especially compared with offshore resources. Therefore, an option is to develop offshore capability so that you can deliver your projects using a variety of resources with variable costs. Price everything based on domestic prices, but use offshore resources to improve your margins and your ability to cover project overruns without killing your profits.
Situation: A company’s clients are demanding increasingly faster response times, particularly in areas that historically have not been considered mission critical. Clients also want faster answers to technical questions. Is this a common occurrence, and would you adjust pricing in response? How do you handle demands for faster delivery?
Advice from the CEOs:
If clients are demanding faster delivery, it’s entirely reasonable to tier your rates for different levels of service and delivery. Create cost / ROI breakdowns for different options, and let your clients make a business decision about the level of responsiveness that they need.
When brining on new clients, do a worst case down time analysis for the prospect as part of your evaluation process, then provide price options and let the prospect evaluate what is important to them. This is similar to different price / deductible levels with health or car insurance.
You will need to educate your current client base on what you are doing for them, and when they are reaching the upper levels of service provision under their current contract.
When you provide remote service, communicate what you have done.
Email individualized update reports to client contacts.
When you meet clients face to face, have a printout of service provided and toot your own horn about your service and delivery.
Be aware of the needs of clients who have distributed locations across time zones. A two-hour response time on the West Coast at 8:00 in the morning, translates to a half day for an East Coast location because they can’t call you until 11:00am Eastern time.
Situation: A company has a long standing relationship providing an exclusive product to a major customer and has a negotiated price and volume contract for this product. The customer changes product design every few years, and the company is the favored supplier of certain components. The customer’s purchasing agent has asked to renegotiate price on the current contract. The company wants to maintain a good supplier relationship with the company, but doesn’t want to lower the price on its product. How should the CEO work with the purchasing agent?
Advice from the CEOs:
There are two distinct opinions from the group:
You have a contract in place for volume and price. If you yield on price now just to assure the remaining business on the current contract you are saying, in essence, that future pricing contracts are also negotiable even after the contract is negotiated and signed.
On the other hand, if you know that there is a model design change in process and want to assure a good ongoing relationship with the company you may choose to yield a bit on price for the remainder of the current contract.
The choice between these two will be a gut choice based on your relationship with the customer as well as your past history with the purchasing agent.
You might want to try a creative alternative. Check with your own component vendor and inquire about pricing if you place orders for your own remaining components on the current product today versus in several weeks. If there is a discount for placing the order today, call the purchasing agent and tell him that if he orders the remaining product on the current contract today, you will pass on the discount that you receive from your vendor. If you don’t get the order today, then you will lose the discount, and there may be a delay on your being able to deliver the remaining parts under the current contract.
Interview with Doug Merritt, President & CEO, Baynote
Situation: A company has a proven technology and satisfied customers. To achieve their goals, they need delivery on sales and service to ramp revenue. At the same time, new opportunities arise daily. How do you keep the team focused on execution and delivery?
Advice from Doug Merritt:
The first thing to focus on is focus itself. Most of us don’t suffer from lack of opportunities, but from an inability to make hard choices and diligently pursue the few critical or high pay-off options. To tell the difference between gold nuggets and distracting bright shiny objects, you must have a clear strategy and priorities on customers and channels you want to develop. It is critical to choose the right opportunities that will optimize achievement of the strategic plan and to say not to those that don’t. This must be constantly reaffirmed through a simple set of metrics around your optimal customer set, revenue ramp, and quality of services delivered.
The second thing is attracting the right talent. A small and rapidly growing company has little time and resources to effectively train fresh talent. If scale is the issue, it’s important to identify and attract experienced individuals – those who have proven their ability to deliver and who bring along a high quality, proven, loyal following. Top talent that can open the purse strings of your target customers. This means hiring rock stars who do this better than you can! The challenge for the CEO is remembering that success almost always comes from hiring people who can do their jobs much better than you ever could. The CEO’s unique talent isn’t being the smartest person in the room – it’s your ability to build and guide an organization that will achieve more than you can alone.
Third is to keep the team focused on the most important priorities. The CEO needs to generate a crisp vision and to distribute information that maintains focus on that vision. Most “Type A” overachievers want to do lots of things well. The key is doing the right things well. You do this by measuring, and by creating transparency around the few key levers that drive the strategy. It helps your cause to say no to a visible and enticing “bright shiny object” that, in the past, the team would have reluctantly accepted. Finally, it also helps to create a few large and non-negotiable milestones that get the company to focus, as a unit, on achievement. Ultimately, the CEO needs to coach and guide their team to do the right things right.
Situation: A company is in contact with an Eastern European company that seeks outsourced business from the US. The CEO seeks guidance on challenges managing as well as formalizing this relationship. What is your experience outsourcing to Eastern Europe?
Advice from the CEOs:
Location in Eastern Europe is important. There have been concerns with both corruption and IP protection in Russia. Some other Eastern European are more aligned with US/European values and farther up the ramp as outsource partners.
Experience of other US companies suggests that your spec must be written much more tightly than if you were doing the work here. If you can’t write a tight spec on the work, don’t outsource it!
Contract outsourced work on a fixed fee basis with the bulk of payment due on completion. This helps to assure that you receive timely delivery and the quality of work required.
Set up thresholds for the circumstances to engage an outsource partner.
Say one US worker is economically worth 5 foreign workers in your domain. Do you have enough work to support this?
Determine who will manage the outsourced work. A European is fine, as long as they have experience managing outsourced work.
Someone on your team will become their Project Manager. This can be VERY time consuming.
Consider setting up an offshore company to shelter some of the revenue from the outsourced work.
You want to locate the offshore company in a tax-free country, and to have them handle the funds connected with the outsourced work.
The contact in the tax-free country will likely be an accountant, lawyer or both. There are many reputable individuals who do this in tax-free countries, but be sure to check references and background carefully.
Situation: A key customer just asked for a price reduction. Our raw materials costs have increased and eroded our margins. What is the best way to respond?
Advice from the CEOs:
Are you selling a commodity or a unique and differentiated product?
Commodities rarely command a premium above market unless you can bundle with differentiated delivery.
Unique or differentiated products justify a premium because the customer has only two choices: purchase at your price or try to develop an alternate source.
The customer may have valid reasons to request a lower price.
Counter with a combination lower price and lower level product to retain your margins.
If the sale involves service, assign less expensive resources in return for a lower price to preserve margins.
Define the trade-off to the customer so that it becomes their decision, not yours.
Adjust your terminology. Use “run rate” vs. “price,” and speak of balancing resources assigned. Avoid cheapening or commoditizing your offering to meet the customer’s price demand.
Don’t assume that there is such a thing as a “fair price” or “fair margin.” The price is whatever the customer is willing to pay for your offering. The price increases the more unique it is, and the more critical to the customer’s needs.
Do NOT share your cost and margin information – as company policy.
Consider combinations of pricing, terms and delivery that keep you whole while offering the customer different price points.