The question may seem obvious to most people. For example, I decide I want to buy a new pickle ball paddle. I go to my local sporting goods store, make a selection and pay for it. The store received a payment from me hopefully at a value above what they paid for the product; therefore, they made money on the sale. I paid a price (dollars) and the company received revenue (dollars). So, they made their money from a sale to a customer. One would think that in a business-to-business sale, the same thing would hold true. In practice, it is a bit more complex than this.
I remember working with a procurement agent earlier in my career on a deal with one of our suppliers. This gentleman told me we should “make our money off our customers, not off our suppliers.” In business, to be successful everyone in the supply chain needs to make money. There needs to be profit for all. Some industries do a better job of taking care of their suppliers than others. The good ones realize that there is a benefit to keeping their suppliers heathy financially and allowing all parties to make money.
Wouldn’t it be great if larger companies could see clearly some of the decisions that impact profitability in their supply chain? Let’s look at some of the ways that business-to-business transactions hurt a supplier, in particular a small business with limited financial resources.
- Extending payment terms—It is common for companies to request quotes for services without specifying their desired payment plan. The supplier provides a price with terms that require payment in a given period of time after expenses are incurred (net 30 days is common). The customer will issue an order for longer payment terms and squeeze the small business to finance the balance. Worse still, the customer will agree to pay in 30 days but intentionally not start the payment process until the invoice is past due.
- Unrealistic expectations in negotiations—Even in situations where projects are competitively bid, some larger companies want to further control the selected supplier’s profit margin. In all proposed business, each supplier has to balance the risk/reward equation. When a small business accepts a fixed price development project, the small business agrees to take on a risk of overrun due to unknowns.
- Performance failures on the part of the customer—I was fortunate enough to work for some great bosses during my career. One boss taught me that the cost of a program invariably goes up when the program extends. Another taught me why starts and stops are inefficient. I also learned that when a customer doesn’t deliver on their obligations, it drives up costs and causes delays in delivery (and delay in payment), meaning the small business may need to carry funding longer than expected.
This wouldn’t be an honest article if it didn’t also recognize that pricing and negotiations must be fair for all. I attended an aerospace conference several years ago where an independent auditor showed how profit margins compared depending on position in the supply chain. The data showed that the tier 2 and 3 suppliers had a profit margin at least one order of magnitude higher than the OEM. Greed, whether on the part of the buyer or the seller, leads to unhealthy business relationships in the long run.
Ah, greed, it is one of those nebulous terms. In a business negotiation, generally the label “greed” is assigned to the person on the other end of the equation. How much profit is too much? Discussion of that idea could fill an entire article on its own. To boil it down, in the end, the transaction needs to be fair to all and everyone needs to receive value in order for business to be successful. For most businesses selling a service or product, value is measured in profit.
One of KTM Solutions’ differentiators is our focus on shared success. We believe that our customer must receive value and be profitable from the services and products we provide. The economic equation must balance on both sides to truly achieve this goal. KTM Solutions is committed to the idea of shared success. In fact, we have refunded money to customers at the end of a project when the project went better than expected. In addition, we have offered discounts on accepted standard product pricing for future deliveries when we found more efficient ways to produce the same products. In developmental projects, through a regimented communication and review process, we work together with our customers to reduce risk, save cost, and increase value. Together, when we share the risk, we usually find a way to provide a solution that is financially beneficial to all. Unfortunately, these benefits are impossible to define or quantify during the bid and negotiation process. When our customers agree to work with us toward shared success, the result is almost always positive for all.
So, back to the original question. If you are a business owner, an individual responsible for making purchasing decisions, or a person who influences purchasing decisions, where do you expect to make your money? Do you view the supply chain as a place to maximize your profits at the supplier’s expense? Do you consciously or unconsciously think, “If this supplier goes under, there are others waiting in line to take their place”? Do you consider how your decisions impact the health of your suppliers? Is shared success a goal? Or will you look for ways to win at the expense of those who helped to get you there?
Paul V. Kumler, P.E., is president of KTM Solutions, an engineering company that services the aerospace and large-scale manufacturing industries. In addition to aero structures engineering services, KTM Solutions designs and builds tooling supporting a broad clientele and various industries. (www.ktmmechanical.com) The company is headquartered in Greer, South Carolina, with remote offices in Charleston, South Carolina. Mr. Kumler serves in several volunteer roles including the SC Aerospace Advisory Board. Mr. Kumler, a professional engineer, is licensed in Louisiana, South Carolina, Texas, and Washington. He is married to Ginger A. Kumler. Together, they have two grown children and three grandchildren.