Fact-Based Negotiation: A Step-by-Step Recipe for Success
Check out recommended practices for conducting collaborative, fact-based discussions with suppliers. Follow these steps and see your discussions with suppliers become more fruitful for increased cost savings.
Rick Hyde: Hello, everyone, and welcome to Fact-Based Negotiations. My name is Rick Hyde. I’m the Director of Customer Success here at aPriori, and I’m happy to be joined today by Abe Chaves. Abe is a Principal Consultant in our Applied Services Organization, and let’s get started.
Abe Chaves: All right, thank you, Rick. I also want to thank you for attending this session and for taking the time to be here. For those of you who know me know that I’ve been talking about this subject for years and years and years, and much of the content is gonna be a repeat of that, but what we have done as a company this year is we have created a playbook, It’s essentially a collection of step-by-step instructions, recipes if you want, that show our clients how to use aPriori to achieve certain business goals. In this case, how to conduct fact-based and data-driven discussions, fact-based negotiations… however you want to call this. So, what we’re gonna do is we’re gonna start by talking about different sourcing situations and challenges and how aPriori and fact-based discussions can help, and then we’re gonna get into the meat of the presentation, which is really the steps that we recommend that you take to alleviate some of those discussions.
What is the Goal of a Collaborative Fact-Based Negotiation Strategy?
AC: And then we are going to end with just a couple of case studies that exemplify not only the process that we have discussed but also the success that you can gain from following that recipe, in essence. So, let’s get started here. Now again, those of you who have heard me speak about this before know that I firmly believe that this method of fact-based discussions, data-driven discussions and aPriori and using aPriori is really a win-win for both sides, for the customer and the supplier, and I think you’ll see that throughout this presentation here, but the goal of fact-based negotiations or discussions with suppliers is to ensure that you buy parts at a fair price. That you’re not overpaying for the parts and that the customers and the suppliers don’t lose money. If the suppliers lose money in some parts, they’re gonna have to overcharge you in others ’cause they’re in business to make money, and that just doesn’t work well for a good relationship.
AC: aPriori will help you find out where the real opportunities are so you can focus your efforts where it actually makes a difference, and you’re not wasting your time or the supplier’s time trying to squeeze dollars where there are none to give, basically. We also help you at the outset of MPI of a new part or of a derivative part or when you’re trying to buy or purchase a part for the first time to be able to purchase it at a fair price from day one in essence. So, to try to maybe not eliminate, but certainly reduce that cycle of renegotiating and renegotiating a part that a customer and their supplier have gotten used to, every year or every other year, renegotiating a part.
AC: It also helps you, aPriori helps you generate your own estimates so that you don’t have to ask your suppliers for estimates constantly, when your internal customers want estimates, like again, maybe the product development team, when they’re trying to decide between one concept or another, they want to get a little bit of a sense for how much each one costs. Your product management team, when they’re doing their budgeting and profit loss type of predictions, they want to know how much things cost, so you are constantly sending requests to your suppliers for this type of estimate when there is really no business yet to be given, and obviously, that makes you more expensive to do business with, and this would save you time ’cause it can respond to your internal customers faster and save your suppliers time.
How to Get the Best Price on Parts With aPriori’s Detailed Cost Breakdowns
AC: And then last but not least, it will help you pretty much the most economical way to make the part with your supplier’s capabilities. So aPriori will recommend what they believe is the most cost-effective way to make a part, and then you can send the RFQs to those suppliers who are best suited to make it most economically. And believe me, the suppliers will appreciate that, having been a supplier at one point in time, because we wanna quote things that we are best suited for because we know we’re competitive. And if you’re not competitive… If you think that you’re not going to be competitive in this bid, you still have to put the effort into responding to it, but you know you have little chance of getting it.
AC: So it’s effort that you know you’re going to… That you may not have any gain from, and so they appreciate basically bidding on two parts and components that they know that they’re gonna be cost-effective in making so that they can be competitive. Alright, so in a nutshell, we really make you more efficient and more effective. We make you more efficient by helping you figure out which parts are worth pursuing so you don’t have to renegotiate every part and make you more efficient also by determining which suppliers to send their RFQs to. And then we make it more effective by giving you sufficient detail about the cost of the part to have meaningful discussions with the supplier, the details also help you figure out where your estimates and the supplier quote are different, where is that gap, so you can focus your discussions on resolving those differences and that’s where the savings will come from.
AC: So, that’s in a nutshell what the challenges that we’re trying to address here, and here’s the steps that we are asking you to follow, right? So, start by costing your parts. So, let’s not boil the ocean. Let’s scope the parts that you want to cost, right? It could be all the sheet metal parts that you’re buying from this supplier. You wanna see which ones are worth actually revisiting or not. It could be that you are maybe want to re-cost all the castings that you’re buying in China because maybe you’re trying to see if you can buy somewhere else because of tariffs or other reasons. So, let’s scope the parts that you want to cost and collect the data to be able to cost them.
AC: Then you cost them in aPriori, aPriori gives you different tools that you can use to cost a lot of parts at the same time. The main tool is called bulk costing, but you can also do something called deep costing. If you have an assembly, product, or mini-module and want to cost all the parts in that module, you can just deep cost that assembly. Or we now have something called matrix costing, which allows you to cost a group of parts in many different ways all at the same time, basically. So, you could say, for example, those castings in China, you can say, aPriori, go cost me all these castings in China, in Malaysia, Mexico, and in Eastern Europe. And aPriori will go and give you all those results back. So many tools that you have to be able to cost multiple times at the same… Multiple parts at the same time.
AC: And then you can review your results, make sure that you have the, your costs are complete, that you have paint on the parts that are supposed to be painted, debar on the parts that are supposed to debar, and so on. So, you can obtain reliable detailed cost and manufacturing data. So, start by costing your parts. Once you have generated those costs, now we need to conduct an analysis of that data. So, we call this spend analysis. And spend analysis is really nothing more than your ability to cost many parts and then analyze many parts and bubble up the ones that have opportunity so that you can spend more time, where it matters, more time making money basically, or saving money. So that’s all spend analysis is, and aPriori has many different ways to report and slice and dice that data to show you what opportunities might be, but the main, principal report that we encourage customers to use when doing cost analysis is the cost outline identification report.
AC: So, this report actually shows you two charts on the same page. And it is important that you look at them both at the same time. That the top chart is basically showing you, on the black bar here, what you are currently paying for the part. So, your price times the number of units you buy in a year, which becomes your spend on that part of assembly or component. And then the cost that aPriori thinks you could be getting, what could be your cost times the number of units in a year. So, this is your, could be spend and the delta between the two, the difference between the two is actually your potential savings—what is your opportunity, basically. The bottom one is just a straight comparison. What you’re paying for the part versus what aPriori thinks you could be paying for the part. And then that difference is the percent difference plotted over here.
AC: And the reason that you want to look at them both at the same time, it’s because you want parts, components, assemblies, where you have a sufficient difference in cost versus estimate so that you have more likelihood of actually negotiating some, negotiating a reduction and enough potential savings that is worth your time. So, for example, here you have, this part that has a very large difference between what aPriori thinks you could be paying and what you’re actually paying for the part, but you have very little potential savings, So, that may not be worth your time. So, this report is meant to help you figure out how to prioritize your opportunities and which ones are really worth your time spent, and which ones are really worth spending your time on.
AC: So now that you’ve done that, you’ve done a lot of good work and a lot of activity, but you have had no accomplishment yet. You don’t have any savings. So, this next step or next set of sub-steps is basically meant to turn those opportunities into dollars. All right. So, this is how you now use the cost data that aPriori gave you. Couple it with supplier information to actually get to savings.
Improve Negotiation With Suppliers With Precise Cost-Reduction Estimates
AC: And for that, we encourage a, what we think is some fairly simple but very effective process. You start, like we said, by costing your parts in aPriori, and aPriori will help you understand where the cost of your parts is going. You use that estimate as a cost target. But notice that it’s not a nice little red dot right in the middle. It’s kind of a fuzzy target. aPriori basically says the fair cost of that part, the fair price of that part is somewhere in this area here. And if you’re close enough to that, then that’s good enough. But if you’re far away, that’s where your opportunity is. So don’t take the aPriori estimate as accurate to the penny because it is no such thing as an estimate like that.
AC: So, you use that as a target. And now, you need to get data from your suppliers. And I understand that the reality is that a lot of suppliers do not want to give you a detailed breakdown of the cost. And I promise you I will talk about that in this presentation later on. But for the moment, let’s just say that you got a breakdown from your supplier. You then take that cost breakdown and compare it to the aPriori cost details, and you figure out where that difference is, where is the difference between your cost estimate and the quote. And it is on that difference that you’re gonna focus your conversations to resolve the difference. Now, notice that I said resolve the difference, because, in some cases, there are things that you can do to lower the cost, and in some cases, there’ll be things that the supplier can do to lower the cost. But the fact is that if you get to understand where the difference is, you more than likely will find a solution that will save you money.
AC: Okay. So, start by getting the cost details from aPriori. I think everyone that is familiar with aPriori will know that aPriori will give you a summary of that cost. It will help you understand how much of the cost is in material and how much is in labor and overhead, and so on. And if there is tooling, how much of that cost is in the tooling? But we also give you a very detailed manufacturing and cost breakdown on every step of the process that is necessary that is used to make that part. So, in this machine casting here that we have, aPriori will give you both manufacturing and cost details about the casting process, what machine is used, what is the labor time and cycle time, and how much material was consumed. And the same thing for the machining side. So that you then understand all the total cost of that machine casting, which is around 160 here, how much of it was in casting and how much of it was in machining.
AC: This is the contribution of each process to the total cost. So if you are buying this casting, aPriori will tell you the fair price of this casting is about $160. And let’s say that you’re paying $250 for it, that will bubble up on your expend analysis, and it’ll say, “Hey, you’re, there is a big difference between what you’re paying and what you could be paying, basically.” And now you can have a conversation with the supplier and just basically start by going down line by line. And you can say, “Hey, I did an estimate of this casting, but it’s not fitting too well with the quote that I had from you. I estimate that the casting portion is about $150.” The supplier might say, “Yeah, it’s about $155, that’s close enough.”
AC: No argument there. And you can go down and say, I estimate the machining should have been, $10, $11, $12, something like that. Suppliers can say, “No, that’s a lot more than that.” You see, I do machine castings, but all I have is three access mills because most of the time, I just drill holes and I finish a couple of surfaces, but I don’t have a lathe, and yours require some turning. So, I had to send it out. So, I had to package it. I had to pay for shipping, I had to pay a supplier to do the machining. They had to ship it back to me, and then I had to inspect it on the way here. And for all of those external processes, not only did I have to pay, but I had to charge you a premium because I had to manage it. I’m running the risk if that person messes up the machining, maybe I have to pull another casting, and that’s the most expensive portion of it. So, I’m running that risk. So, I have to charge you a premium for that.
AC: So, at that point, now you understand, you understand why there was a difference, where there was a difference, and now you have decisions to make. Maybe you only use that supplier for just the casting, and then you use your own machining, your own machining sub-supplier, and then just ship it to that, to that supplier. So, the point is, you get enough details to be able to have a conversation with your supplier as to where the costs are going. All right. Okay. So, in a nutshell, the cost details help you by providing you sufficient insight into the cost of the parcel, you understand what goes into making your part, which in turn makes it possible for you to spot where the difference between your estimate and the supplier quote is.
AC: And then allows you for a transparent conversation with the supplier. That casting supplier may not really care that you are not doing the machining at his place. It’s not really suited for that. So he can just, not worry about, outsourcing the machining and just give you the casting. So very transparent conversation and it’s not always squeezing the supplier but helping figure out where the solution is. And the last thing it does, which it seems it’s small, but it’s actually pretty significant, is it gives you detailed cost targets. Now it’s not just at the part level, but also at the sub-function level, that you’re gonna have an idea as to how much each function should cost. Okay. All right.
AC: But in order to make this work, you need information from the supplier. You need facts from the supplier. And I always recommend that you start by figuring out how your part is being made and then look at how aPriori is recommending to be made because a lot of the savings will come from those differences. And by no means am I saying that one is right, and one is wrong. You will find situations where aPriori says this is the most economical way to make it, and the supplier is making it in a different way. And there could be valid reasons for that. So, we… I… Before I came back to aPriori, I was a sales manager at a boutique, a very fancy access machine shop. We made rotating equipment, basically.
AC: And we only had five-axis machines. That’s all we had. So, if you sent me a part that is pretty simple and it could be made easily on a three-axis mill with two setups, I’m gonna quarter in a file axis because that’s all I have, right? And it’s not that I’m wrong, I’m making it in a very possible way. But hey, that could be a big difference as to why you were expecting to pay less, and I’m charging you more. And that again, at that point, now you understand, and you can make a decision as to what you do with that part, right? But having been on the supply side, I know that we suppliers can give you at least this amount of information. So, when you ask for a breakdown, the supplier should be able, most suppliers should be able to, at a minimum, give you what the material cost is because we all have to calculate how much material is gonna get consumed. Either because we have to tell you, so you provided for me, or I have to go buy it, right? I have to calculate how much is it gonna cost me to turn that raw material into the part or the components that you want, right? So, I need to estimate this manufacturing cost.
AC: And then, the secondary processes are almost always, not always, but almost always calculated separately because you may wanna part paint it and the other customer doesn’t. You may need an extra inspection, and the other customer doesn’t. So those secondary processes are typically calculated separately. Obviously, if you need assembly, you made parts, now you have to put them together. That typically is another cost that is calculated separately because some people don’t need assembling. And then any one-time costs are always going to be that way, right? They’re fixtures, tooling, programming, and things like that. So, at the bare minimum, a supplier should be able to give you this type of breakdown. All right. Even when you get that type of breakdown, though, you’re not done yet. And the reason you’re not done yet is that it is most likely that a supplier will give you the cost breakdown in a different way than aPriori gives you a breakdown, right? So, their definition of certain terms, it’s not the same as a definition that aPriori has, and so you have to map these things, right? You have to map what the supplier is giving you to what aPriori is giving you.
AC: Let me just give you a few common situations, right? A supplier might have one labor and overhead rate for the entire fabrication shop, right? So, making sheet metal parts and welding them together and things like that, that they have a shop for that. And then I have a shop for machining, and that might have a different labor and overhead rate, but each shop may have one rate, and aPriori actually varies its rates from machine to machine and process to process, so aPriori will say that the guy who does welding makes more money than the guy that’s operating a bend brake, right? And so that mapping would have to be done. You have to make some adjustments; you have to make some adjustments for that. Some people have overhead rates that are just a multiplier of labor costs. That’s the way we did it when I was a supplier there. We had direct, indirect, and SGNA rates, but there were just multiples of the labor costs basically. A lot of suppliers, a lot of companies will have one machine rate. One machine rate, so it’s basically all loaded labor overhead, both overhead direct and indirect overhead, all in one machine rate. In which case, you just have to add what aPriori says. The labor overhead rates are all together, and now you can make an apples-to-apples comparison. So, there is some mapping to be done.
AC: To make models a little bit more complicated, there are other things that can be hidden or different. And then you will have to maybe separate a few and make accounting for that, right? I know companies whose setup costs are buried in the overhead rate. And so, excuse me one second. And so basically, making a few parts cost the same as making a whole bunch of parts in one batch size, right? The cost per part is the same because they don’t include set-up costs as a breakout, like aPriori does, right? Well, other people include some of the secondary processes in their overhead if they feel like they have to do them most of the time, such as inspection, for example. And some suppliers even have an average utilization that they quote with, right? So, all they know is that last year for every hundred pounds of metal that went out, 72 pounds of metal left the factory. And so, they just use a 72% utilization until the year after, where they might change it to 71%, or maybe they change it quarter by quarter.
AC: So, if you design your part, for example, to use very little material, you took painful steps to do that, you may not be getting the credit you deserve because that supplier basically is using an average utilization, right? So, you have to take some things into consideration when you’re looking at the cost aPriori is giving you versus the detailed data that your supplier is giving you, right? So now the conversation changes, and now you have information from the supplier, you have details from aPriori, you can compare them, and now you can see where those differences are. So, the conversation with the supplier is not as intimidating anymore. It isn’t an, “I’m gonna go squeeze you for $20 because I’m paying $20 too much for this part.” It’s not that high level, you have to give me this much savings or our traditional like we used to do years and years ago, I need 5% from you this year on all the parts that I buy and an average 5%, I don’t care where you get it from.
AC: It isn’t that kind of confrontational type of conversation. The conversation becomes more, “Hey, help me understand the difference between what I have and what you have. Help me understand what goes into your material cost. Why do we have such a large difference?” On one occasion, for example, we found the reject rate, the scrap parts, and the cost of the scrap parts the supplier was putting into material costs. So yeah, there was a big difference between what we were estimating for material costs and what the supplier was saying because all that scrap was going into material costs.
AC: Now, if we hadn’t gotten down to that level of detail, we would’ve never found out that there was some issue with the stability of that part. Something was causing that part to be unstable, and now we could address that issue even if we had to involve engineering, right? Or maybe it’s something that the supplier needs to do that we can help them do, but that was the issue. It wasn’t material cost; it was the stability of the part. Help me understand why there is a big difference between your overhead rate and ours. Sometimes, well, just that example I used before between the file axis and the three axis. If I’m making it on a file axis, no kidding, my overhead rate is gonna be much larger than a three-axis ’cause a machine like that costs a lot more money. And so that depreciation portion makes that overhead rate larger. So, there could be something that you can do about that, whether it is move the part or make other arrangements, right? But the big one is this one at the top here ’cause when suppliers don’t wanna give you details, you just approach the entire quote and the entire estimate, you just say, “Hey, just help me understand the difference between your quote and what I estimated, here’s what I estimated and how I estimated it.”
AC: And I will give you a very specific example because I think this is a place where a lot of people get hung up on. I did a workshop with one of our customers, well, about a year ago now, actually. These were plastic parts, and after the workshop, we basically invited two suppliers to come to discuss the top-three parts that we identified as potential savings for those three suppliers, for those two suppliers. And they specifically chose a very cooperative supplier that had never given them any details whatsoever except the bottom line of the quote. And this was actually the number two supplier of plastic parts. So, they bought a lot of plastic from these guys.
AC: And so, the supplier showed up. Sure enough, they didn’t give any details ahead of time, although they knew they were gonna come to talk about three specific parts. The thing is, though, they know they have to bring the details with them because they know that you’re gonna be discussing these parts. So, my customer just started by saying, “Hey, we spend a lot of money with you, and we’ve been doing estimates on the parts that we’re spending the most money on, and for these three parts, the estimates that we calculate are different from the estimates than the price that we’re paying. And so, we just wanna understand what went wrong and where the difference is. Did we do something wrong in estimating? Where is that difference, and why does the difference exist? That’s all we wanna know.”
AC: And we started down the path, right? We estimate that this is what you’re spending on material; the material cost on this part is about this much. And that was pretty close. We estimated their… The labor content is about this much, and that was pretty close. And then we got to overhead, and then the overhead was, and they basically said, “How much do you think that’s overhead? No, what overhead rate are you using?” So, we basically said, direct overhead is this. They said, “No, that’s about half of what we have.” And well, it turned out when we did some digging that they were including direct overhead, indirect overhead, and SGNA in what they called overhead. So, once we added those three, that was pretty close, actually within a couple of dollars on a 60 some dollars an hour rate.
AC: So that was actually, they were satisfied that, that was okay, but then the price was still off, right? It turns out it was cycle time. So, we started digging and digging in more ’cause you gotta multiply those race time cycle time to get costs. And the cycle time they had was about twice what we were estimating, but they had been making that part for a long time, and that part had been made for even longer because they inherited the mold. So that mold came from another supplier to them. And the automatic inserts, the cores that go in and out basically, didn’t work anymore. So, they had to pause the mold, put the inserts manually, and then let the mold go, alright?
AC: So, it was causing a significant increase in cycle time. So, was the supplier wrong? Not really. Was aPriori wrong? Not really, that what you found a difference, you knew why the difference was, and in fact, this customer asked, “I understand now why this is, but why didn’t you say something?” The guy said, “I told you; I have asked for a new mold.” I think he said it twice already, and I haven’t heard anything back from you. But the person that buys the mold, the CapEx guy, is different from the piece part guy. And so, the CapEx guy is looking at this thing and saying, “Hey, I don’t hear any complaints on quality or anything from this part. I already have a mold. I’m going to spend my money buying molds for parts I don’t have a mold on, right?” So, he didn’t prioritize them until they got together and understood that the piece part cost was suffering a lot.
AC: And, maybe, long story short, they got a new mold, right? So that’s what I said. Sometimes it’s about understanding the difference and not really just greasing the supplier, right? So that’s how you deal with a supplier that doesn’t want to give any details. After that, if you do this a few times, they will begin to actually give you details ’cause they’ll understand that it’s not about squeezing them. It’s about figuring out where that difference is.
AC: Right. So now, given what aPriori says, that’s how you use the facts, right? You get the facts from aPriori, you get information from the supplier, and then you find solutions from the discussions with the supplier. And, like I said before, you start by confirming the manufacturing process. You ask if any of the secondary processes are done internally or externally, and you’ll find that a lot of times, they are done externally. Find out what premium you’re being charged, right? I told you already that I was a supplier, we charged 50%, and I kid you not, anything that we paid for externally, we tagged a 50% premium on top of that. Now that’s high just about for just about anything. But there are some things that require a little more premium and some things that require much less premium.
AC: So, for example, even for transportation cost, we add 50%, right? So, you have to understand what they are in the premium tool and how much premium you’re paying and then see if you can negotiate those premiums down. Because by the way, we charge you profit on top of that because that premium is what we say, Okay, it costs this, we paid this, plus managing it is another 50%, so we charge you 50%, and then we charge you that markup, that profit, we charge you on top of that. So, it’s like salt in the wound, right? So, after you’re done with that, now investigate every aspect of the cost, see where your difference is, and see if there is anything you can do about it. We talked about material costs, right? But people like GE, Clyde Union, General Motors, all those guys drop shipped material to us because they could buy it a lot cheaper than we could.
AC: And I understand, many of you may already be doing something similar to that or giving access to your material distributors to your suppliers. But again, it’s about finding where the problem is. It could be that your part, it’s a very well-designed part that should have an 80-some percent utilization, and your suppliers are charging you an average of 72%. And then it becomes a negotiation, right? I understand that that’s your average, but you gotta understand that 70%, 75% of the cost of this part is material, and 10% of that, if I give you 10% points in utilization, that’s another 7% that you’re making on that part. So sometimes it opens the door for a negotiation, right?
AC: Set up costs, sometimes you don’t, it is not quite evident how much cost is going into setting up the part, and maybe you’re buying too few, and that’s what’s driving your cost up. We talked about overheads already. We talked about logistics, carriers, and cycle times, right? So, it’s about going step by step, getting deeper and deeper and deeper. When you find a difference, just go deeper into the process. And so, with that, basically, we’re gonna discuss just a couple of examples that give you a flavor for how this works in real life. So let me just go through a couple of case studies here, and I mean, just fast-forward this.
AC: So, this is a customer they’re making, this is a sheet metal part; he’s a computer manufacturer. They make this by tens of…More than 10,000 a year, let’s just say that, right? So, thousands and thousands of these things. They were paying $11.36 for this part. aPriori came back and said that part should cost between $8.50 and $9, right? That’s the way I read these things. If our customer had just come back to the supplier and said, Hey, I need you to cut $2.50 out of the cost of your part just at the top level, I need, you gotta cut the cost of this part by $2, that conversation doesn’t go very far, right? So, we asked for details, details came back, and we started looking at this thing line by line. They said the material cost was $5.10; we had $5.70. Well, they… Material in China, which is where this thing is coming from, sometimes it’s a lot cheaper. They were actually calculating a better utilization than we were, and so that gave us a little advantage. That’s good, right? Not huge, but some. But then, when you get to the next line here, labor costs per part, they said it was $2.85; we say it’s $0.29.
AC: Now that’s a huge gap there, right? That’s a huge difference. So, you pause, and you investigate that. All right? So now we needed to figure out what was going on with labor costs. So, we take this; they told us how many parts per hour they were making out of that stage tooling line. It was a stamping, obviously, 150 parts per hour, and you multiply that by dollars per part; you get dollars per hour. You have to divide that by nine because there are nine stages, right? So, there are nine stations, and each guy passes it to the next, and they do the next stamping, boom, boom, boom, boom, boom—nine of those guys.
AC: So, you divide 150 times 285 divided by 9, and that gives you $47.50 an hour in China. All right? So that’s about 10 times as much as we have seen on other parts because we did the math for other parts, and we came up between the highest one was $5.10, and the… $5.20. And the lowest one was $4.90. So, between $5.20 and $4.90. So right around $5 an hour for some of the other parts. And this one was $47.50, all right? Something went wrong. There was a mistake made somewhere, right? And now, it has become a much easier conversation. Now that you got to the bottom of it because you dig down into where the difference was and why there was a difference. Figure out that that conversation with the supplier now becomes a lot easier.
AC: So, the next one, again, is a sheet metal part. And this really exemplifies the entire process as we typically teach it, right? So, this part goes into a cash machine. It separates basically the motors that are generating heat from the bills. And so, the paint that this part is using, that coating is really a heat-absorbent paint, and it’s very expensive. So, when our customer did an estimate using aPriori, the cost that aPriori was estimating was much lower than what they were paying. So, they looked at a material cost that was about the same. The setup cost was about the same, and the making cost was about the same. And sure enough, where the big difference was, was in paint cost. So now they dug into the paint cost. It turns out the paint was being done by a sub-supplier, not just the supplier as it often is.
AC: So, the first thing that the customer did was they went into the aPriori code and made sure themselves that we were estimating the cost of paint in an acceptable manner, something that was acceptable to the industry. And so, they had more confidence in the number that was coming out. Then they dug into our assumptions because this process requires certain assumptions. The cost of paint per pound, for example, the density of the paint, things like that. And then they edited those terms. So, they put paint that costs $50 a kilo in. Now the moment that they found out that this paint was really that expensive and that aPriori didn’t have any paints that were that expensive. Maybe I forgot what it is, but the highest paint cost is about $8 a kilo. They could have stopped there.
AC: They could have just said, “Oh yeah, that difference is because there is a huge difference in the cost of paint.” And they could have gone nowhere from there, but they didn’t. They actually edited all those fields, recalculated the cost, and this cost was still high. So, they dug one level deeper and found out that the difference was in the amount of paint consumed. aPriori was estimating, I forget what it was; let’s just say it was half a kilo. And the sub-supplier had originally estimated about a kilo. So, it was almost a two-to-one difference. I’m just making up the kilo and half a kilo. But that allowed them to take those details and then go with their supplier to the sub-supplier and find out the actual numbers, how they had come up with the estimate of the paint, and what they were actually consuming.
AC: And because the paint was so expensive, the customer did have records, and they had records of how much paint they loaded in the tank and then how many parts were in each batch. And they had been making the part for a few years. So, they knew they could calculate an average of paint consumption per part, basically. And sure enough, that was a lot closer to what aPriori was saying that what they were had originally estimated. And again, now it became a much easier conversation where the cost to the supplier became lower, and that rolled up to about $15 a part savings for the customer, basically on a part that they make tens of thousands of. So again, both examples are just meant to exemplify the process and what you can gain from following the process. In essence, it’s about getting to the bottom of where the difference is. So, with that, I will ask if you have any questions.
RH: Thanks so much, Abe. There are a few questions here. I don’t think we’ll have time for all of them. But one question that came through was, what do you think about the tactic of not sharing the model with your supplier but alternatively requiring them to defend their price? In this person’s experience, if you provide the supplier with your modeled price, they’ll want to dig into all of the details, and it could drag on for an extended period of time.
AC: So, I think that in the beginning, it’s just out of the gate; it’s just like letting somebody bid first. It’s like, “Do I provide this cost target even before I get the bids back?” So, the answer is always no. You let people bid first, and then you can have a cost target on the second round, basically. But I do agree that you basically tell the customer, “Hey, I did an estimate. We think there is a discrepancy between this part, these two parts, and these three parts. Can you take a… Can you re-look at this part and see if you can come closer to around this much?” And let them come back and see if they can come down in price.
AC: And if they don’t, then you find out where the difference is. ‘Cause they may not understand. So, this guy, for example, this last example, the supplier would not have understood why there was a difference anyway. And they would have probably said, “I can give you a couple percent more, but really not the difference that you’re looking for.” And then, you can dig into the details. But yes, I think letting them come back with something is a good idea. And in fact, I had in one of the other presentations I’ve done in the past; I’ve done those two parallels, basically. Hey, if you want to save some time, just tell them, “Can you take a re-look at this part? Or can you read that, right?” So, I kind of agree.
RH: Excellent. Thanks, Abe. And maybe one more, if folks don’t mind if we go a little bit over. In this participant’s experience with new parts or development quotes. He finds that the suppliers tend to pad the estimate with very conservative cycle times. He’s curious about your thoughts on how to describe or drive the discussion around the correct cycle time, as the conservative cycle times become a sunk cost later when they realize the actuals.
AC: All right. So having been on the supplier side, I will tell you that we do that when you, when… There is some risk that the supplier is taking when they take on a new part they have never made before. So, they don’t have any experience in doing it. They can estimate the cycle time but don’t know how much it is. So, I’m going to pad it a little bit. And I don’t have an optimal process for making your part yet. So, for example, if it’s a machine part, I may start with a program that works, but it has, it’s cutting air for a lot of percentage of the time. Maybe 30% of the cut time is airtime. And so, I know that before I get a chance to perfect that program, I am going to be, it’s going to be more expensive for me. I am going to be using that machine longer. So, I am going to pad, but it’s good to use aPriori to say, “Hey, at some point, you’re going to get stable, and you’re going to get to this price, and now let’s figure out what a fair initial price is but let’s have a goal to get to this price within the first hundred parts.” Or, I think you have to work with them on that learning curve, so to speak, and use aPriori for what your stable price will be while still allowing them for charging you a little more in the beginning to absorb the risk of not knowing exactly what it’s going to cost them.
AC: If the part is very similar to others, a lot of this goes out the door. So, we tried a couple of these things. So, we made a lot of wheels for GE, a lot of compressors for GE, where the diameters were between 24 inches and 20 inches. The number of blades may have changed between 17 blades, 20 blades, and 21 blades. And the twist on the blades may be a little different, but they have the same material and basic design. And we pretty much knew how to create a program that was effective for that. So, if the part is very similar to something they’ve been making, then that risk and that known perfection cost should be a lot lower, if not nonexistent. And we got caught doing things because we wanted to price every new part as a new part so that we would charge for a fixture every time.
AC: And at one point, GE came back and said, “Wait a minute, all these wheels are about the same. Why are you charging us for the fixture again? I’m sure you can use the fixture that you used for that one for this one.” And they had to be balanced. So, we had a balancing arbor. So, we charged for a new balancing arbor. They said, “No, no, no. No. Yeah. This one is a little bigger. I get you. Go ahead and charge me for one, but this one you should be able to use the same as the other one.” So, yeah, you gotta pay attention as to whether it really, truly is a new part or is similar, it’s new, but it’s similar. I hope that makes sense.
RH: Great. Yeah. Thank you so much, Abe. And thank you, everybody, for participating in this session. That’s all we have for this session. So, thank you so much, and enjoy the rest of your day. Bye.