My name is Todd Norwood and I’m the Founder and President of Intertwine Corporation. I’ve spent over 25 years working for automotive suppliers. The Automotive Supplier Chronicles is my monthly blog series where I share true stories about my experiences working for and with automotive suppliers. The stories you’ll read here are the very reasons Intertwine exists. These are true stories, but I’m not out to make fun of anyone or disparage any companies, so names may be changed.
Hiding Money on the Customer Cost Breakdown
At one of the companies I worked for, I was hired to replace a guy that was fired for losing too many new business opportunities. The company was known for making prototype parts, but they also targeted low volume production business because it provided a more consistent revenue stream.
When I took over the account, annual sales for this customer were forecasted to drop from about $20 Million to $4 Million in two years, if we didn’t win some new business. I was being compensated well, but there was pressure to perform. I understood that if I didn’t help the company win some new business there probably wouldn’t be a need for my position.
The good news is that we had plenty of opportunities – through the first year or so the customer sent us about 20 “Mega-Bundle” RFQ’s (Request for Quote). Each Mega-Bundle RFQ was for a group of parts, such as the complete underbody or upper structure for a vehicle. These RFQ packages had 30 or more parts in them; and each one represented an opportunity to win at least ten million dollars in annual sales; and some were worth over $100 million per Year. We just needed to find a way to win one or two of these RFQ packages.
The bad news is that the company had no idea how to quote production parts. They were used to the prototype world, where you just add $100 per Part if you’re concerned about something; whereas in the world of production, the cost of a part must be broken down to 1/100th of a penny; and each item will be scrutinized. Quoting prototype parts is completely different than quoting production parts.
The company also didn’t fully understand their cost, so they quoted overhead as a percentage of direct labor, for example 400%. This meant that when we ran small parts on a machine, which one operator could load and unload at a labor rate of $25 per Hour, the machine rate would be $100 per Hour ($25 x 400% = $100 per Hour). However, if we were running a large part on the same machine; and that part required two operators to load plus two more to unload, then the labor cost was $100 per Hour (4 heads x $25 per hour) and the overhead cost for the machine for that part would be $400 per Hour. So, for one part the machine cost was $100 per Hour and the next part it was $400 per Hour – for the exact same machine. This didn’t make any sense, it couldn’t be reasonably explained to the customer, and most importantly, it put us in an uncompetitive position.
In that first year, the Cost Estimator, “Jim”, and I moved more data than I’ve ever moved before, churning through one mega bundle RFQ after another. We quoted multiple packages multiple times, but the result was always the same: our price was too high and we couldn’t meet the customer target!
We were down to what I thought were our last realistic opportunities – low volume vehicles that would be built at customer plants close to ours, giving us a logistical advantage. We were focused on a couple of packages that suited our equipment; and I let the Buyer know we really wanted to win them. The Buyer and his Manager knew how hard we had worked over the last year; and I made sure they were aware of our “need” to maintain the same level of sales. I had developed a relationship of trust and credibility with them by providing timely and accurate information, they appreciated it, and they wanted to see us win something.
We were given a target price of say $250 per Vehicle for the parts included in the mega-bundle package; and we had to sign a document saying we would agree to make the bundle of parts for the target price or we wouldn’t. If we agreed, we would need to provide a breakdown for each part that would total the agreed target price.
Long story short, as with every time before, the estimator “Jim” said we couldn’t meet the price and shouldn’t sign the agreement. Knowing how desperate the situation was; and having a background in cost estimating, I asked him to give me the files and information to review it. I put my own cost estimate together, using what I knew to be realistic hourly machine rates, plus other variables. I worked until midnight two days in a row to complete it; and on the day the quote was due we all met – the President, CFO, plus Management from Engineering, Purchasing, Sales, etc. Jim and I were also there.
Everyone in the meeting understood the need for us to win some business. Jim explained his estimate and why he didn’t think we should agree to the targets. I presented my estimates; and I explained what was different, plus my reasoning and the basis for my rates. My conclusion was that we could agree to the customer targets and cover our cost, including our sales and general administration expenses, but with no profit margin.
In my opinion, we were better off as a company with the business than without it, because of the financial contribution it provided to the company’s fixed cost. My strategy was to agree to the targets and grow the profit margin through engineering changes.
I’ll never forget the meeting – the President, “Burt”, though about it for a few minutes and said “What the hell, it’s not my money. If it doesn’t work we’ll at least go out with a big boom.” He then signed the documents agreeing to the customer target price for two different mega-bundle packages of parts; and I sent it to the customer that afternoon.
It was about two weeks later when we were officially awarded the business – the two mega-bundles combined represented about $36 Million in annual sales, more than making up for the business we were about to lose. It was the biggest sales win the company ever had.
We scrambled to put together the individual piece price breakdowns for each part in the package, totaling the agreed target price. When we filled out the customer breakdown form we had to hide money for real cost items that didn’t fit into the customer breakdown form, such as scrap, productivity reductions, indirect labor, etc.
The problem is that we hid a bunch of the cost in some studs that were going to be attached to a skid plate – there were 11 of them; they cost $.08 each, but on the customer cost breakdown form we put that they were $.22 each, so we had $1.54 of profit ($.14 per stud x 11 studs) hidden in the cost of these studs; and when the customer deleted them on the first round of design changes, we had to give back all of the money we put on the form.
The moral of the story is that when you’re trying to hide money on a customer cost breakdown form, be sure to spread that money out across multiple line items if possible.