Nothing is More Permanent than a Temporary Price
Quoting is a delicate balance between the desire to win a job and the need to hit your target margin when the job has been won. In the world of high-mix manufacturing, striking this balance can be extremely difficult. Often you are required to price parts that have never seen your production floor. Coupling that with rising labor and material costs in a highly-inflationary environment can render your quotes unprofitable in a matter of weeks if you aren’t careful.
There is an old saying “nothing is more permanent than a temporary solution”. Though potentially a touch cliché, the same principle applies to quoting. The first price that you send to a customer is your “temporary solution”. It is nothing more than an educated guess. The more accurate we can make that guess, the better off your business will be. Of course now you can raise the price, but how quickly do you want to do that? Dramatic price increases, especially early in a business relationship, are rarely performed for a myriad of reasons. Do you really want to risk losing their business when they are satisfied and looking to reorder? Instead, prices are usually slowly raised over time to “soften the blow”. If your first quote turns out to be unprofitable when you run the part, you are constantly behind the curve, playing catch-up from your “temporary solution”.
There are 4 major parts to performing the quoting exercise correctly, that a job shop software like Steelhead can dramatically improve all of them:
One. Have a Consistent Process
If a customer contacted three different salesmen at your company would they get three different prices? If so, this is - fundamentally - inaccurate quoting. It shows a lack of grasp by business leadership about what truly drives your margins. The customer will only receive one of those prices based on who they talked to. Is it the correct one? Were any of them correct? Pricing is the foundation of any economy, yet the accuracy of pricing in high-mix environments is often pushed into the background, deemed as too complex. After all, if you haven’t run the part before, how are you supposed to get it right anyway? The answer is to have a process, collect data on that process, and iterate over time using the insights from the data you have collected. If you can’t have multiple people in your job shop quote the same part and get the exact same price, it is time to take a deep dive into your quoting process.
Two. Price Quotes to Hit Your Target Margin
With Steelhead, you aren’t boxed into some “one size fits none” quoting system. It may feel as though your business is identical to others, however, the way you operate is bound to be unique in many ways. Arguably, uniqueness in some way or another is the only reason for its existence and success. Steelhead gives the flexibility you need to reflect your business accurately in the quoting system without changing all your processes to match a pre-canned idea of how you should operate.
The algorithm we develop with you is owned (and even editable for the technically inclined) by your company and can be adjusted over time for greater accuracy. This can reflect job shop insights you have gained from Steelhead data collection, changes in your processes, or any number or price-related variables.
Three. Validate Quotes and Feed Data to Future Quotes
If you aren’t validating your quotes, how do you know if it was a profitable endeavor? It is hard to improve your quoting process when you have no idea of where things are going right and where they are going wrong. The total profitability of a business is very easy to calculate, however, individual part performance is extremely difficult if you don’t have a system in place to take most of the leg work out of it.
The data collected through Steelhead opens up the ability to quickly quote with hundreds of data points such as your latest inventory prices, mix ratios, labor rates, market prices on natural gas, metals, etc., and just about anything else you can think of that would affect your pricing and job costs. Never ran the part before? You can easily look in Steelhead for similar-sized or shaped parts that you have run in the past, browse old notes, view the profitability of that part, and determine the key variables that should be fed into a new quote. All of this allows for more accuracy from the first quote you send to every price update going forward.
Four. Monitor Prices and Execute Painless Price Increases
No quote price should be static for too long. The US inflation rate for 2022 was 6.5%. That means for every two months a quote was not converted to an order, you lost over 1% of your quote to inflation alone. If you are working with outdated data this gets even worse, 4-month-old data with a two-month waiting period for a quote to convert is a minimal price hit of 3.25%. Real profit hit can be far higher. Armed with the latest data and a lightning fast quoting system, you can easily stay on top of your prices, quote for future rises in material prices, pull in your latest labor rates, and even shorten expiration times on quotes to reduce this burden.
When you need to increase a price, the ability to break it down for a customer is invaluable to the quality of your interaction. Customers are far more understanding of a data-driven price increase than a sob story about how your profit margins were way down across the board. From the customer’s perspective, it gives the feeling of a true partnership, rather than an attempt to remedy your poor business decisions with their money.
To Summarize...
Accurate quotes are important for the first iteration on a part (we obviously want to be profitable from the start) but equally important for every price change from there forward. Anytime you send a price, you set an expectation for your customer. In most cases, some assumption of a price increase over time will be baked into the customer’s mind based on the number you give them. If you wildly exceed that assumption with your next price change, conversations are bound to be far more difficult. This can put you on rocky ground, stuck between your “temporary solution” and the real price you need to make money.
Accurate job shop quoting is imperative to the continued success of your business and Steelhead makes it fast and easy. To get a demo of the job shop software, reach out to sales@gosteelhead.com today.
About the Author
Zach Erkkila is the Director of Engineering at Steelhead Technologies. Zach has extensive experience in full-stack web and mobile development and has brought many products to market for companies ranging in size from startups to publicly traded corporations. He is driven by removing pain points in software, pushing him to continually make Steelhead faster and more intuitive.