Volume 6 Issue 9 October 2005
The Cutting Edge
How to Compete
Adding Value vs. Lowering Cost
by Jim Plavecsky
In today’s increasingly competitive marketplace, many window manufacturers are facing stiff price competition. This often creates the urge to cut prices in order to get the business. Profit margins shrink. The top managers then go into survival mode. They call in their purchasing managers and say, “We need to cut costs so you need to lower our cost of materials.”
They call in their manufacturing managers and say, “you need to produce more windows at a faster pace and lower manufacturing overheads.” They call in the quality manager and say, “you need to lower reject rates and field complaints.” But do the three of these guys sit down together and talk? You would be surprised how often they do not.
Looking at the Costs
All too often, the purchasing or materials manager looks only at the prices of various components without considering the potential impact upon conversion costs, reject rates, warranty expense and marketability. For example, choosing low-priced components which involve additional manufacturing steps, assembly labor, energy usage or higher scrap rates do not lower the overall unit cost. It may, in fact, result in an increase in costs of goods sold.
This type of reaction is hardly going to help the company survive. Instead, the reverse is likely to happen. More manufacturing steps that involve more people in the fabrication process result in an increasing likelihood of product defects usually. One recent study has found that every time a person touches a component in the manufacturing process, it increases the probability of failure rate by a tenth of a percent! Also, the price at the pump is a constant reminder that energy costs are on the rise. Materials which involve greater amounts of heat or electricity to process will result in overall costs that are not only higher, but also harder to predict. What started out as a cost-cutting initiative results in a product offering now severely lacking in value.
Getting the Best Value
The smart window manufacturer segments the market into distinct areas of opportunity. Each market segment represents a specific target market with different desired performance levels along with a corresponding price point. Different framing systems all represent selling opportunities at distinct levels. Within each market segment, the leading window manufacturer will offer the greatest value for a particular price point. This is achieved by selecting “systems” which offer the capability of creating the lowest cost, highest performance and highest quality products targeted for each market segment. The analysis must include not only the choice of materials and components, but also the conversion costs involved in transforming these materials into the finished product exhibiting the specifications desired by each target market. The manufacturing process, including the number of people required, the number of fabrication steps, the energy usage involved, the equipment cost including maintenance and the cost of quality must all be considered by combining the viewpoints of various team leaders within the company from all functional areas including purchasing, operations management and quality assurance.
Remember, not every customer wants to buy the lowest cost product. But everyone wants to buy a product with the highest value offering the features that are desired with the given budget in mind.
I have window manufacturers telling me that they cannot invest in a better lock that sells for a nickel more. The same day, I will get a call from another manufacturer who wants to build a triple pane window with krypton instead of argon. I explain to him that the krypton will add almost six dollars to the cost of his window, and he says, “Did you know that it stays inside the window twice as long? I’ll get an extra twelve!”
Now, that guy can sell!
Jim Plavecsky is the owner of Windowtech Sales Inc., a sales and consulting firm specializing in the door and window industry based in Columbus, Ohio. He may be reached at JimPlav@insight.rr.com
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