Michael Paris
Paris Consultants
Hinsdale, Ill.
Ostensibly, the article was about ways U.S. manufacturers raise prices
in commodity markets. I believe it really underscored the fallacy of
"the commodity mindset." U.S. manufacturers with this mindset end
up competing in global markets based on price alone. This is a losing
game. No question that most Asian (and perhaps in the future, African) companies compete far better on price than those in the U.S. A
credible study from the National Association of Manufacturers puts
the U.S. cost disadvantage at 32%, equivalent to $6/hr in labor.
In essence, the commodity mindset nulls much of the potential
value that suppliers bring to customers in the form of creativity, extra
engineering and tooling, and support. Yet, these very activities can
distinguish innovative, engineered, value-added products from commodities. Common sense says customized and innovative products
should command a premium price. And, in fact, these services do add
costs. However, companies that fall into the commodity mindset trap
may simply tack on a profit margin (40%, say, for overhead) to the
estimated costs of extra engineering and materials. This becomes the
starting point for negotiating a new price, and the end of the addedvalue calculations. Missing from these calculations are the direct benefits to the customer.
Added value is anything that a reasonable customer should be willing to pay for. This includes such items as manufacturing expertise;
quick response; rapid prototyping; and production and application engineering. Basically, added value includes all the tasks customers want
to off-load. For example, OEMs in dozens of markets have decided that
they only want to design and assemble. Everything in between — subassembly, machining, and fabrication — gets outsourced.
Quantifying these added-value tasks is straightforward. Each requires
mostly the time of your engineers and production people, whose costs
are well understood. Your fully burdened hourly costs are adequate
for estimating customer costs and potential savings. It is even easier to
calculate the value of inventory, tooling, and capital investments needed
to make customers' products. While these costs are not trivial, they are
dwarfed by the goodwill a firm can accrue. If your customer believes you
"have his back," he will rely on you more and more.
Recognize that U.S. firms have the advantage when it comes to
Lean, continuous-realignment, and value-added initiatives. Cheap-labor competitors are generally uninterested in such things. Having cut
the low-labor-cost monster down to size, it's time to take a look at how
to build, or rebuild, your business.
Paris Consultants is a management-consulting firm.