The Most Valuable Lessons I’ve Learned about Price Reduction

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Back when I was starting out in industry, it was not unusual for companies to rotate new personnel across various functional areas during their first few years. The purpose of this was three-fold. First, the rotation presented employees the opportunity to try out various jobs across the company to see if there was a good match, which could both set up the employee for higher job satisfaction and better line them up for success. Second, regardless of the area where an employee ended up, job rotation was seen as valuable for that individual since it helped them understand the challenges different functions had to tackle, as well as how the employee’s job fit into the “big scheme” of things. Finally, it was a good way to evaluate new employees relative to ability.

In my first five years I was lucky enough to have assignments in product design (my degree is in mechanical engineering), reliability and quality control. At that juncture, I had the opportunity to transfer into purchasing as a “strategic” buyer.

I didn’t get much training as I adapted to my new position. The purchasing-related advice I got early on was to “work with” suppliers to get price reductions on the parts and components I had responsibility for buying and was told this would be primarily through negotiations.

After a few months, I realized that the price reductions I’d get through this approach—which was pretty much a zero-sum game—would be incremental at best, not really advancing the competitiveness of my employer. It was also difficult to get suppliers to agree to be on the “lose” side of that equation. After all, suppliers fiercely resist any change in price that would reduce their profit margins. For this reason, I started looking for a “win/win” approach that would be more palatable to suppliers and gain the price reductions that I would be evaluated on.

The division of the company I worked in manufactured lawn care equipment, including walk-behind mowers. Among the many product types I had responsibility for was processed-steel tubing, which would include the mower’s handlebars. Since walk-behind mowers represented our division’s highest-volume product, it made sense to me to look for a price reduction on one of their parts. Any reduction would be amplified, thus having significantly more impact than those on lower volume products.

Consequently, I did target handlebars for my first cost-reduction effort. Visiting our tubing source, I both looked for any waste they might have in their processing and didn’t come up with anything significant. I then asked the owners if they had any ideas on how to reduce the cost of the product. They suggested that I look at look at changing the bar’s finish from the relatively expensive chrome-plating finish. I decided that powder-coating paint would be a good, less expensive alternative and found that it was.

Our mower decks were cast aluminum, and I was able to find a grey hue of powder paint that pretty much matched the deck’s finish. I went ahead and got a prototype of the power-painted handlebar and presented it to engineering for evaluation and approval. They thought it was a good idea but said I would have to pass it by marketing since it represented a change in appearance.

One look and marketing gave me a resounding “NO.” I asked why, since I pointed out that powder paint would be just as effective in rust prevention as chrome. They replied that changing from chrome to paint would reduce the “look” of the mower, costing loss of sales in the marketplace. Consequently, my idea was rejected.

But I gained two valuable lessons. First, the price reduction would have turned out to be minimal, contributing only $10,000 or so to my personnel cost reduction goal. The point, here was that this decrease was so incremental, it was hardly worth the effort. In the future, I told myself, my efforts needed to be on potential product changes that would result in significant savings. Second, I learned that I needed to review potential changes with all stakeholders before proceeding.

I worked under this paradigm and in the end was able to produce “win/win” price reductions, primarily through redesign—reduction in un-needed features and/or reduced functionality, tolerance changes that would allow for a reduction in material cost and material changes. For instance, a review of processing on hydraulic steering valves demonstrated that eliminating some of the tight tolerances would still produce the needed functionality of our lower pressure application and decrease pricing by 33% without the supplier having to reduce their margins. The overall savings was well into the five figures; i.e., worth the effort.

Based on my experience as a strategic buyer, I felt I had found my niche and stayed in purchasing over the rest of my career. While I was regarded as a tough negotiator, I was also considered collaborative and fair in dealing with suppliers.

Henry Ford once said: “The short successes that can be gained in a brief time and without difficulty are not worth much.”

I believe gaining price reductions through positional negotiation is the “easy” approach and doesn’t really give a company a competitive advantage in the marketplace. After all, do you really believe that your company’s purchasing function does a better job negotiating than the competition? I doubt it.

There is a truth relative to price and cost, which I always preached to the people I managed. Specifically:

“Prices go down when costs go down.”

And the most effective way to achieve this is through collaboration with your suppliers.

Paul Ericksen’s book is Better Business: Breaking Down the Walls of the Purchasing Silo. Ericksen has 40 years of experience in industry, primarily in supply management at two large original equipment manufacturers.