Discounts and increases

I strive to start each year on a positive note, but 2015 sure hasn’t taken long to throw us our first challenging management scenario. It requires immediate oversight of rapidly changing economic conditions.

Just as the year was getting started, reports of weakening economies, collapsing currencies, job reductions and a volatile, collapsing energy market changed everything. In the U.S., the fall of oil prices has led to cutbacks in the energy industry, which is our bread and butter. As a result, many customers are going into cutback mode. The rapid downturn has created a near panic among many, and they didn’t waste time canceling or holding off on expected projects.

Adding to the drama, we received formal letters from two important customers explaining that “due to uncertain conditions and reduced demand, we want your cooperation and we really, really need you to lower all your prices, effective immediately— and we’re thinking a 25 percent reduction in everything is a good place to start.” OK, the letters weren’t worded exactly like that, but that certainly was their message, albeit stated in lofty terms, like “being a partner” and “helping maintain competitiveness.”

It wasn’t that I was shocked to get the let’s-work-together-to-contain-costs letters, but demanding that a shop offer a 25 percent reduction on all pricing was the most excessive request I’d received in a long time. And, while both accounts asked for the same percentage cost reduction, one even requested that it be applied to POs issued but not yet paid. That was a first for me. It’s not possible to lower pricing 25 percent on all in-house orders, so it didn’t happen, but it became obvious that current circumstances required a reassessment of strategy. We immediately started reducing spending, postponing noncritical projects and even trimming payroll.

On top of this, we identified a pattern of slow-paying customers that was trending worse, from large corporate clients to small operations. This means our shop must have enough cash on hand to float slow-paying accounts, or else our own payables will likely follow the same pattern. Floating customers is not good use of a machine shop’s cash, particularly when those customers were issuing sizable jobs and enjoying bonuses 2 months prior. Now, its chaos and calamity, resulting in shops getting squeezed, fair or not.

It’s tempting to vent, but as I discussed in last month’s column, we’re working in a global market and that requires effective management to survive.

While our shop always seeks and implements cost-cutting techniques, customers must understand that a lot of expenses aren’t going down—they’re headed the other way. Perhaps we’re able to make a part a bit cheaper and pass on some savings, but our costs for medical insurance, deliveries and freight, raw materials, licenses, permits and wages sure aren’t going to drop 25 percent. We can’t make such demands of our employees or our vendors.

When it’s all said and done, we’ll meet face to face with these companies, hear their stories and negotiate a workable response. We’ll trim as required and move on. We’re bidding on new items and I’m confident new opportunities will materialize. In the meantime, don’t take a request for a discount as an absolute. State your case and negotiate. CTE