Walking the fine line between remaining profitable and remaining competitive is a difficult balancing act for most suppliers. Manufacturers who purchase key components from their suppliers are, of course, concerned with price. Knowing how a supplier determines price is key to understanding how quotes are developed.
Take The Time To Get On The Same Page
Every request for quote should start with a discussion between buyer and supplier. This initial discussion is not a price negotiation; it is a foundational dialogue that will eventually make the step of determining price much easier to achieve. The buyer should take the time to articulate his or her ideas and goals to the prospective supplier — and should never work with a supplier who is not willing to invest the time to understand your goals.
A buyer may enter the initial discussion with detailed engineering drawings or perhaps only a vague idea of the product specifications they want or even what their options are — and that’s fine! When the buyer lays out the basics of what their company hopes to achieve, the supplier can use their expertise to come up with ideas about the best way to meet the needs at the lowest cost.
Volume: Number Of Units And The Effect On Price
Suppliers and manufacturers almost always factor the number of units ordered into the price per unit. A buyer may not enter the discussion with a hard-and-fast order number, but the
Necessary Durability And The Cost Of Tooling
The cost of making the tool necessary for the job also weighs heavily on the price. Again, this has a lot to do with volume. A tool that will be used only once for a job that requires three parts is much different than a tool that has to be durable enough to make a million of the same item. If a tool has to hold up only for a few production runs, its creation costs will be lower. Also, tools designed for high volumes will often be made with multiple cavities such as 4, 9, or 16 cavities. Each time the machine indexes then 4, 9, or 16 parts are produced simultaneously, greatly increasing production speed and dramatically lowering unit costs. But multi-cavity tools cost much more than single cavity tools, so it behooves both parties to have a mutual expectation on volume clearly established.
There are other factors that go into the cost of forming tools. Does the supplier already own the tool required for the specific job? If so, tooling costs could be zero. Do they have to make a new tool from scratch? Then tooling costs may be significant. Often, it’s somewhere in between, where an existing tool can be modified to satisfy the new order, or an adapter can be built that converts an existing tool into a somewhat different tool that can meet the new requirements.
In most cases, a buyer will want to start with a small quantity before placing a large order. The supplier should be able to produce a low- or no-cost prototype sample as part of their quality management system. Buyers should keep in mind, however, that just because the supplier can make one of something doesn’t mean they can make 10,000. Reliable replication is difficult, and buyers should always look at their supplier’s quality-management protocols going forward.
Price, quality and service are usually the three components that make up the concept of value. An array of factors goes into determining price, but it all starts with a discussion. Buyers should talk honestly with their suppliers about what they want to accomplish; from that discussion, the process — and eventually the best price and the best overall value — will emerge.