Let's talk about negotiations in manufacturing. Where there is tendering, there will always be negotiations and renegotiations of a variety of factors, from pricing to delivery timelines. In the contract manufacturing industry, where a single project lasts for at least a few years and products are manufactured in mass quantities, that negotiation process becomes crucial to ensuring margin retention over the contract lifespan .
We have identified 3 main negotiation points that contract manufacturers will face:
At the very beginning, while configuring the cost breakdown for the tender, complex calculations come into play. Contract manufacturers have to strike a delicate balance between increasing profit margins and getting the contract. One small tweak in the discount given for a specific part can lead to a large difference in the final price and gross profit over time. Contract manufacturers thus have to precisely calculate and configure, not only the most efficient engineering and manufacturing processes, but also how to win the tender without losing money in the long run. At this time, there will be numerous conversations between engineering, purchasing, management, and sales on points such as the plant location, discounts given, and processes chosen.
Price Changes or Adjustments
With price changes or readjustments in the nature of the business, there is also a need for contract manufacturers to forecast these factors accurately and take this into consideration before the project starts. This requires historical data from previous contracts to be available for analysis and forecasting purposes. As some contracts don’t allow for price adjustments during the contract time span, this data becomes crucial to determining the potential for margin retention over the contract life span.
The work doesn’t stop once the business is awarded the contract. The contract framework will determine the milestones that trigger adjustments in the product itself, the number of items to be produced and potential further changes. Once that milestone is hit, there is definitely the need to refer back to that complex cost breakdown some calculations will need to be done all over again. That leads to many versions of the cost breakdown being produced, especially when you require engineering and management approval and input.
For sales representatives, this can be tough to keep track of and gain access quickly, especially over a period of a few years.
Renegotiation for Contract Renewal / Extension
At the end of the contract, it is natural to want to continue that business relationship. In order to get an extension or to re-tender for the contract, sales teams need to be tactical, and remember what worked the last time. This generally means that they will refer to previous successful quotes or cost breakdowns. If there are multiple versions of the quotes floating around, that process can take longer than necessary, as they have to compare the different versions to figure out what worked.
In the end, at all these negotiation points, a large number of quote versions will end up being produced through the merging of excel sheets from different departments. The amount of time needed to coordinate across departments will lead to a lot of productive time lost.
One way to fix this problem? A central repository where all the quotes reside, for easy access. If the solution can allow for detailed breakdowns of each part and process, the better. If the solution can provide the ability to do complex calculations based on the CAD provided from engineering, it would be perfect.
A solution that matches these specifics? A Configure-Price-Quote (CPQ) Solution, especially a cloud-based one. A CPQ helps to create an environment where sales teams can work efficiently to create a cost breakdown, without the need for merged excel sheets across departments. All information, including the BOM, is created directly in the CPQ, approved in the CPQ, and generated in the CPQ. The data is then stored in the CPQ so that teams can easily refer to previous quotes and configurations. Using the integration to the ERP, management can use that historical data to project margin retention for current and future projects.