Uncovering EBITDA improvements

Pricing in a high frequency quoting business

Pricing is one of the most important pieces of a business to get right and can be the difference between winning a business contract or losing business. Pricing can also be the difference between operating profitability and operating at a loss. In businesses with a high SKU mix that requires a high volume of quotes, there are so many more opportunities to get pricing right…or wrong.

Setting up formalized data driven processes is key for consistently making optimal pricing decisions. To set this up, we need to understand our manufacturing costs and efficiency points so a business can price to win. Winning means more than just getting the contract; it means acquiring the business in a profitable way.

Manufacturing Operational Excellence & Understanding

Most manufacturers face significant market competition, so it is imperative that the business drives efficiency in operations to compete profitably. The process requires an understanding of production costs and how each characteristic of a job (order size, customer lead time, demand variability, unique raw materials, customer specific QA requirements, and other factors) impacts these costs.

Organizations typically have a basic understanding of standard costs. Elevating this level of understanding, however, can become a competitive advantage. When we understand where things add cost in the production process, or where we can drive more efficiency in the production process, a business can price more optimally.

When we understand the efficiency drivers, we are able to direct customers to the optimal points. This allows the manufacturer to price more competitively while still pricing at a profitable margin.

Case Study: Manufacturer of Medical Equipment

In this study, a manufacturer of medical equipment typically provided quotes for new parts at three standard quantity levels (25 units, 50 units, and 100 units). As the volume levels increased, the price per piece went down. This process was driven by a combination of the market standard and how things were always done.

When we analyzed the production process, it became clear that these quantity levels did not align with any manufacturing efficiency levels. As the volumes went up, there were economies of scale in terms of setup being amortized over a larger volume.

There were also challenges for some production processes as the job sizes grew. We saw larger work-in-process (WIP) material on the floor, bigger bottlenecks at constraints, and less flexibility in the flow of the material. Due to feedback from the production floor on these challenges, larger orders were being broken into multiple smaller jobs to streamline production.

The planning team scheduled the smaller jobs back-to-back to maintain the setup efficiency while allowing jobs to move quickly through the plant. However, when reviewing historical data, it became clear that these jobs required multiple setups, as they were not being run in line. The organization was offering customers a discount for ordering larger quantities, but not capturing the efficiency of running the material as a larger job.

Rather than just quoting at the standard quantity levels historically used, we wanted to quote at the most efficient quantity levels. This required a real understanding of the production process and where we could drive more efficiency.

For this organization, keeping the machines running in 24-hour increments allowed them to ensure setups were on the first shift with the most experienced machinist. This enabled quicker setups with fewer quality challenges. This scheduling shift also ensured there was enough productivity from a job in relation to the set-up time.

Instead of standard quantity levels, we used the production methods for each part to calculate the most efficient quantity multiples by part. This allowed us to price at quantity levels, allowing the business to produce these parts efficiently, ultimately resulting in competitive pricing for the customer.

Operational Excellence & Understanding combined with Pricing Strategy: Driving a Competitive Advantage

When we combine lean operational excellence and understanding of what is driving efficiency (or inefficiency) with pricing strategy, the result is competitive advantage. We can price at the optimal quantity points which will be more competitive than standard levels.

This concept goes much further than quantity level pricing. This methodology is applicable across various characteristics that impact manufacturing efficiency. For example:

Lead Time:
If a customer has a shorter lead time requirement, the business has less flexibility to schedule in the most optimal way. When pricing, we can provide pricing for the lead time required by the customer, while also providing a discount for a longer lead time option. The manufacturer is therefore able to provide a more competitive price while maintaining profitability when the customer wants to keep a shorter lead time.

QA Requirements
Quality requirements can vary dramatically between customers, resulting in a significant impact on manufacturing cost and efficiency. If a customer has very stringent quality requirements that, for example, require every unit to be tested, this needs to be incorporated into pricing. By providing the customer discount options – switching to a QA sample of the lot instead of each piece – we can highlight the cost of this requirement for the customer.

Offering efficiency visibility for customers is a competitive advantage since most manufacturers only provide the quote based on the customer requirements.

To achieve this competitive advantage, a manufacturer first needs to thoroughly understand their cost drivers and the characteristics that drive efficiency or inefficiency. Next, this needs to be combined with a commercial discussion on how to incorporate these levers into a pricing strategy. If this is brought to the customer as an avenue to reduce inflationary pressure, it can be a win-win: the manufacturer can enjoy better margins and the customer is getting a more competitive total cost.