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Gregory Shultz

Greg Shultz is the Principal Engineer for CenArk Controls, an automation integration company located in Central Arkansas. With over thirty (30) years of experience in the development and integration of manufacturing improves, Mr. Shultz has established himself as a recognized authority in the field ...

Category of Expertise:

Business & Finance

Company:

CENARK CONTROLS, LLC

User Type:

Expert

Published:

04/05/2019 03:17pm
THE LOWER PRICE MYTH

There is a constant pressure to reduce pricing. This has spilled over into the psyche of our culture. Price, lower price and better price! Car dealers are a perfect example of this phenomenon. They are selling comparable products with comparable services, so their only perceived advantage is price. Daily we hear commercials stating, “No one will beat our prices.” But let’s consider, what the automotive consumer gains from this business model. A less expensive car from a dealership that will change hands and policies on a regular basis, because of the dealership’s own price pressures them into huge turnovers. Why do they change names so regularly? This business model doesn’t work.

This is also true in the manufacturing and distribution industries. The traditional strategy is a lower price with a maximum payback period. Depending on the company this could be 6 to 60 months. I would argue that this business model is seriously flawed.

Today the life cycle of manufacturing has shortened. This can either be from the reduced product life cycle, such as electronics. (Have you ever wondered what happens to the huge investments that go into the manufacture of a cell phone that has a life cycle of one year or less?) Or the pressure to get a product to market and establish dominance before the design can be copied or improved by less expensive competitors? The traditional product life cycles of ten to fifteen years are gone. Keeping a business model based on this tradition can be catastrophic.

The key to success is not only managing expenditures but is more relevant on the understanding of the cost of the lost opportunity. To illustrate this, here is a simple example that you may have encountered. Did you see the opportunity?

LOST OPPORTUNITY:

TIME TO MARKET


Let’s use an equipment expenditure as the example. A company needs a piece of equipment to either expand a current line or introduce a new product. Two competing companies have proposed similar systems with similar results at the exact same price. The selection of systems has no impact on the customer, assuming the proper due diligence was performed. Now assume the scenario is different.

The same customer needs the same solution. They need to reduce excessive labor in the product by $360.00 per day. The suppliers still propose equipment with the same results, with this difference.

Supplier 1: Proposed system will cost $40,000 and will be installed in 16 weeks.

Supplier 2: Proposed system will cost $50,000 and will be installed in 12 weeks.

Most businesses would base their choice on price and opt for the $40,000 unit. *

This would be wrong.

Looking at the following spreadsheet we can see that they both suppliers produce the same benefit at a different price. However even with the 25% higher cost Supplier Two can generate an additional $10,080 in profits for the customer before Supplier One even delivers! Both units are actually “paid” in the same week (week 32), but Supplier Two provided the better solution.

WEEK

SUPPLIER ONE: $40,000 delivered in 16 weeks

SUPPLIER TWO: $50,000 delivered in 12 weeks

1

$0.00

$0.00

2

$0.00

$0.00

3

$0.00

$0.00

4

$0.00

$0.00

5

$0.00

$0.00

6

$0.00

$0.00

7

$0.00

$0.00

8

$0.00

$0.00

9

$0.00

$0.00

10

$0.00

$0.00

11

$0.00

$0.00

12

$0.00

$0.00

13

$0.00

$2,520.00

14

$0.00

$5,040.00

15

$0.00

$7,560.00

16

$0.00

$10,080.00

17

$2,520.00

$12,600.00

18

$5,040.00

$15,120.00

19

$7,560.00

$17,640.00

20

$10,080.00

$20,160.00

21

$12,600.00

$22,680.00

22

$15,120.00

$25,200.00

23

$17,640.00

$27,720.00

24

$20,160.00

$30,240.00

25

$22,680.00

$32,760.00

26

$25,200.00

$35,280.00

27

$27,720.00

$37,800.00

28

$30,240.00

$40,320.00

29

$32,760.00

$42,840.00

30

$35,280.00

$45,360.00

31

$37,800.00

$47,880.00

32

$40,320.00

$50,400.00

33

$42,840.00

$52,920.00

34

$45,360.00

$55,440.00

35

$47,880.00

$57,960.00

36

$50,400.00

$60,480.00

37

$52,920.00

$63,000.00

38

$55,440.00

$65,520.00

39

$57,960.00

$68,040.00

40

$60,480.00

$70,560.00

41

$63,000.00

$73,080.00

42

$65,520.00

$75,600.00

43

$68,040.00

$78,120.00

44

$70,560.00

$80,640.00

45

$73,080.00

$83,160.00

46

$75,600.00

$85,680.00

47

$78,120.00

$88,200.00

48

$80,640.00

$90,720.00

49

$83,160.00

$93,240.00

50

$85,680.00

$95,760.00

51

$88,200.00

$98,280.00

52

$90,720.00

$100,800.00



The customer would be able to release their product to the market four weeks earlier. This also illustrates the difference in the first year return of $10,080 for the customer by choosing Supplier Two’s option. That is a 20% return on the higher cost solution. The added benefit of selecting Supplier Two is that the resources that were being wasted by the application needing the solution can be moved to other areas that are more productive, multiplying the benefits to the customer.

SOLUTION:

· Cheaper is not always better.

· Instead of working with the belief of project payoff from the receipt of the system, consider the payoff from the date of placing the order.

· Understand the life cycle of your product and make decisions accordingly.

*You can increase the cost of the examples to illustrate the magnified effects.

For additional information or to review a free no obligation review of your process improvements, please contact CenArk Controls:

Office: 501-314-0840 Fax: 501-859-8381 Email: service@cenarkcontrols.com Web: cenarkcontrols.com

Greg Shultz is the Principal Engineer with CenArk Controls, LLC. He has over thirty years of hands on experience in the design and implementation of automatic and semi-automatic systems in the US, Mexico, Europe and Asia. He can be contacted by calling the CenArk offices at 501-314-0840 (US) or via email at: gregshultz@cenarkcontrols.com.

Keywords

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