It's Not Luck (9 page)

I can’t believe it. It’s too good to be true. Could it be that Pete, in his eagerness to stop the sale of his company, has come up with some farfetched, risky approach?

“Start at the beginning. Take your time,” I say to him. “And prepare yourself for in-depth scrutiny.”

“That’s what I want,” he smiles broadly. “It all fell in place after Don’s phone call.”

“My phone call?” Don says surprised. “I don’t remember giving you any new ideas.”

“Yes, you did,” Pete insists. “A big one.”

“It’s very nice of you to say so,” Don is clearly confused, “especially in front of my boss. But, sorry Pete, what I recall is that I asked how come you can’t compete against the fast printing presses on large quantities, and you can on small ones.”

“Exactly!” Pete is clearly amused by Don’s expression. “You caused us to stop feeling sorry about our apparent disadvantages, and start concentrating on the advantages that we do have.”

“I see,” Don says. But after a moment he adds, “No, I don’t see. I don’t see how your ability to do quick set-ups can help you compete on large quantities.”

“Don, you miss the point,” I say. “Pete didn’t say he is going after the large quantities, he just said that they decided to concentrate on the markets where they have an advantage. Congratulations, Pete. I knew that if you overcame your obsession that big money can only be found in the large quantities, you would find that there are enough additional lucrative markets that require small quantities. So tell me, what are those markets?” I ask, pleased.

Pete doesn’t answer, he just clears his throat in embarrassment. I burst out laughing. It looks like it’s not Don, but me, who missed the mark, and by a mile. “Okay, Pete, tell us your brilliant idea. How can quick set-up help you win the large-quantity market in spite of the speed of your competitors’ presses?”

“Simple,” he says. “Actually, not so simple. Let me start by describing the cloud of our customers.”

“Please do.”

Pete goes to the white board and starts to unfold the cloud. “The objective of a buyer is to be in line with his corporate directives. In order to be in line with his corporate directives, the buyer must try to get the best financial deal from the vendors. In our industry, where set-up is large, the only way to get a price break is to order large quantities. So, in order to get the best financial deal from the vendor, the buyer must order large quantities.”

“This is clear.”

“On the other hand,” Pete continues, “in order to be in line with his corporate directives, the buyer must strive to reduce inventories. I don’t have to tell you to what extent corporate culture has changed in regard to its tolerance for holding large inventories.”

“No, you don’t have to tell us,” I full-heartedly agree.

“This means,” Pete completes the cloud, “that in order to strive to reduce inventories, the buyer must order in small quantities more frequently.”

“The conflict is clear,” Don says, “but the pressure to get low price is dominant, isn’t it?”

“Yes,” Pete agrees.

“Do you see any reason for that to change?” Don continues to ask.

“Maybe,” Pete answers. “As competition in the market becomes more fierce, and I’m talking about the market of my clients, their forecast becomes less accurate. This makes ordering large quantities more hazardous for the buyer. Government regulations are also a big help to us, the printers; every so often they refine the regulations of how the listings of the miniscule ingredients in the food have to appear on the wrapper. Any change, and the entire stock is obsolete. But the real point is that because of the fierce competition, our customers surprise their buyers with more frequent marketing campaigns, which almost always involve some printing change on the wrapper.”

“Their internal communication is so bad? They don’t inform the buyer about the upcoming marketing campaign?” Don asks.

“It’s not so much a problem of internal communication. In the current market, our customers have to react much faster than ever before. Many times they have to launch a new specific marketing campaign within two or three months.”

“So,” Don concludes, “you hope that as time goes by, the buyers will be more receptive to buying smaller quantities?”

“Yes and no. This tendency has already started, and will probably accelerate, but we don’t have time to wait for this gradual process. We have to help it.”

“How?” I inquire.

“By helping our buyers break their cloud,” Pete answers.

That’s certainly the right approach. “Which arrow do you intend to break?” I ask.

“The one that states that in order to get the best financial deal from the vendor, the buyer must order large quantities,” he says.

“Carry on,” I encourage him.

“Wait a minute,” Don interrupts. “If we want to thoroughly scrutinize Pete’s solution, why don’t we try to break the cloud?”

“Good idea,” Pete grins. “The more solutions proposed and knocked down, the more you will be impressed with my solution.”

He sure is confident about his solution. That’s promising.

“The assumption under this arrow,” Don follows the guidelines of breaking a cloud, “is that due to long set-ups, a buyer can get lower prices only if he orders in large quantities. How can we challenge this assumption? You have relatively quick set-up . . . . Wait a minute, why do we have to think like everybody else, why do you have to price according to the time it takes to print? You have a lot of excess capacity, any price that is higher than your raw-material price is better than letting the resources stay idle.”

“Don, are you recommending a price war?” Pete cannot believe his ears.

“No, not at all.” Don is getting excited. “What I’m suggesting is that you match your competitors’ prices for the large quantities.”

Pete tries to say something, but Don is on a roll. “You can do it in spite of the fact that your printing presses are slower, since you have so much excess capacity. It will work. The increased pressure on the buyers to reduce the size of the batches they order will guarantee it. Have you calculated how much more profit you can do? Remember the amount of excess capacity that you have is limited.”

“No, Don, this can’t be the answer,” I say.

“Why not?”

“First of all, I don’t see how matching the competitors’ prices for large quantities will enable the buyer to order in small quantities. The price-per-unit for a large order will still be lower than for a small order.”

“My mistake,” Don agrees. “But, nevertheless, my solution still holds. Pete will be able to compete on those orders, and the fact that he is cheaper for small quantities will give him an advantage. Buyers prefer to work with fewer vendors whenever possible.”

“Don,” I patiently say, “your solution doesn’t break the buyers’ cloud, so it is obvious that it’s not Pete’s solution. Besides, Pete would not come here, all excited, to present a solution based on utilizing the fact that he has excess capacity to lower prices. He must have a much better solution. Isn’t it so, Pete?”

“Yes, of course.” And turning to Don, he adds, “Not only is lowering prices to match competition very risky, the amount of excess capacity we have wouldn’t be sufficient to swing the wrapper section into profitability.”

“Why is it risky to match the competitors’ prices?”

Grinning, Pete answers: “Don, have you considered that the same clients who order large quantities of wrappers for the popular candies are ordering smaller quantities for the less popular candies. It’s the same buyers.”

Don thinks for a minute. Pete and I wait for him.

Finally he says, “Let me see. The buyers expect that the larger the volume, the lower the price per unit.

“Correct,” Pete encourages him, “this is the key.”

“That means,” Don continues somewhat more confidently, “that the buyer not only compares your prices to the competitors, he compares your price per unit for larger orders to your price per unit on smaller orders. Now I see the problem. If you reduce your price per unit on the large quantities, the buyer will demand a proportional reduction on the small quantities, even if for those quantities you currently offer lower prices than the competition.”

“You got it,” Pete smiles. “The habits of the buyers would cause pressure to lower prices across the board. This would ruin the business.”

“That’s clear,” Don agrees. “I don’t see another solution. Alex, do you?”

“Let me try,” I start. “The arrow we are examining is ‘in order to get the best financial deal from the vendor, the buyer must order large quantities,’ because large quantities enable lower prices, which improves profitability. How can I challenge that?”

For a moment I don’t see any way, but then I find the soft spot, the words “financial performance” and “profitability.” Profit is only one of the financial performances a company is concerned about. There is another one, which sometimes is even more important than profit-cash flow.

“Pete,” I ask, “do some of your clients have severe cash flow problems?”

“Some,” Pete answers. “Cash flow is a major concern for a few of my clients, certainly not all. But I don’t see how I can use it to cause them to pay higher prices.”

“Don’t you see? Ordering more frequently in small quantities ties up less cash in inventory. Even if the buyer has to pay higher prices for small orders, he is much better off on his cash flow.”

“But only for the short term.” Pete doesn’t fully agree.

“Pete,” I say, “don’t you know that when cash flow is pressing, only short-term considerations exist.”

Pete thinks about it. “Yes, it might work . . . sometimes . . . for some of my clients. I don’t think I can base my business on it. But in any event, it will strengthen the arguments for my proposal to the buyers. Thank you.”

“You’re welcome.”

“Want to try another idea?” he asks.

“No, Pete,” I laugh, “even if I had one, which I don’t, I’m too eager to hear yours.”

“Our solution,” Pete begins, “is based on a direct attack on the assumption that ordering in large quantities gives the buyer a cheaper price-per-unit.”

“Isn’t that the case in your industry?” Don asks.

“No, it is not,” is Pete’s surprising answer.

“How come?” I’m baffled.

Pete is apparently delighted. “Let’s take a recent case where we lost a sale to one of our competitors.” He takes out a bunch of pages from his folder, and pointing to the top page he says: “This is what we quoted. The first column is the quantity and the second is the price.” Turning to the next page, “And here is what the competition quoted.”

We compare the two pages. At the top, where the quantities are small, Pete’s prices are significantly lower, but as the quantities grow, it gradually changes. Toward the bottom of the pages, Pete’s prices are almost 15% higher. No wonder. Due to Pete’s quicker set-up, we are cheaper for small quantities, but due to the competitor’s faster printing press, he is cheaper for larger quantities.

“I don’t understand you at all,” Don says. “You just claimed that large quantity doesn’t give a lower price-per-unit, and now you give us real price lists that prove the exact opposite. Your list and your competitor’s list have only one thing in common: in both quotes, price-per-unit goes down when the size of the order increases.”

“Continue,” I say to Pete.

“The client elected to order this quantity;” Pete is pointing to a number near the bottom of the page. “And, of course, since for this quantity the competitor is much cheaper than us, we lost the order. But,” he adds in a triumphant voice, “what you don’t know is that for this client this quantity represents his needs for the next six months.”

“So now we know, so what?” My impatient Don.

“I told you, so what,” Pete takes pleasure in teasing Don. “I told you that our client’s forecast is rapidly becoming more unreliable, that their own push for more and more marketing campaigns causes them to change, much more frequently, some of the printing on the wrappers.”

“Yes, you told us, but I still don’t see the relevancy.”

“What is the chance that the client will actually use all of what he ordered?” Pete asks. “Remember his order is theoretically sufficient for the next six months. Do you know how many changes can happen by then?”

“No, I don’t,” Don answers. “But you don’t know either.”

“Maybe you don’t know, but everybody in the industry has a pretty damn good idea,” Pete continues to tease him. “Our industry journals are full of statistics; look at these.”

And he gives us another page. It’s a copy from some magazine. Pointing to a somewhat fuzzy graph he says, “On average, the chance that you’ll use up a six month quantity is only thirty percent.”

I examine the graph. I’ve seen such stuff before, but it’s still surprising. I glance at my watch. In a little less than an hour I have another meeting. Did Pete find a real solution to his marketing problem or not? His confidence indicates that he did. At the snail’s pace that we are moving there is a good chance that I’ll have to postpone my next meeting. Should I do it now?

“I’m coming to it,” Pete assures me. “Our solution is based on the fact that the chance of not using the entire ordered quantity is much less when the order is supposed to cover only the next two months. According to this graph it’s only ten percent. You see, what we have to do is to convince the client that if he considers obsolescence, as he should, then ordering in batches of two months, from us, is giving him a cheaper price-per-unit than ordering in batches of six months from the competitors.”