4 reasons why you over-pay for parts manufacturing

It is so rare, these days, to call somethings price into question. No matter if it is a product or a service. It all has to do with how we perceive the value of an item we are buying. Usually, you do this by comparing the price of an item or service with multiple providers, and then a picture of “value” can be drawn. Of course, this is further complicated with added degrees of uncertainty where quality, delivery and payment terms must be considered. Also read this article we made about What is a “fair” price for manufactured components? if you would like to know more. 

When all these aspects come together, our beautiful brains would set the best option out of the bunch, considering what the most important factors for us are.

But if that is not complicated enough, we must do a similar routine when we evaluate goods or services that cannot be compared as easily. You know, a custom-manufactured part for a machine that is made from a specific aluminium alloy and must meet specific tolerance requirements just cannot be found on a shelf somewhere. What you do is you have to get the prices quoted from suppliers. And that’s where the troubles begin. For this reason we have put together these 4 reasons why you over-pay for parts manufacturing.

" expose your manufactured parts and components to a wider audience of suppliers in more diverse geographical locations... "

As a mechanical engineer, I ran into this problem continuously throughout my career. And it just keeps repeating. That is why we have put together these four reasons why you over-pay for parts manufacture:

1. Unknown value

Let’s kick off with Unknown or perceived value of the components. As we mentioned before it is very hard to predict the value or cost of a custom part that you’ve just made.

And it is equally as hard to do that for suppliers. We have seen numerous examples where suppliers of similar size and setup keep giving inconsistent pricing. Sometimes it can differ several hundred percent per item! They even struggle to re-calculate the price for the same item when it is requested a few months apart.

While this can be easily explained by changing parameters of their calculation and different circumstances of one’s production, it is still not giving any confidence for a company trying to fix and stabilise their product/service costs.

What we then see happen is that companies would settle on a figure that they take for granted and keep buying parts from this supplier without questions. Yes, some price adjustments can happen once or twice a year, but it rarely goes to the advantage of the buyer.

One way to avoid such gross over-paying or captive suppliers is to expose your manufactured parts and components to a wider audience of suppliers in more diverse geographical locations. This way, you will be able to continuously monitor the proposed price for your sourced goods and services, thus, minimising the risks of over-paying. This can also act as good leverage when negotiating prices with your current suppliers. Reality is that most of the times they can meet their competition and if they don’t you always have the option to choose.

"the old-way is no longer the right way..."

2. Re-seller prices

If we have a look at an ordinary mixed order of parts to be manufactured, we will see that most of the time it will be comprised of multiple manufacturing operations that have to be accomplished. Some parts would have to be CNC machined and other laser-cut. Then there might be some parts that have to be bent and formed. Lastly, some might have to be post-processed or painted. This causes a lot of issues for a single Supplier. Only the big suppliers can have all the machinery to achieve this under one roof.

What happens then? Well, suppliers usually have a network of partners that would do these things for them. But this does not come without a severe disadvantage for the buyer.

As a buyer, you are left with two choices- order everything in one place and pay the steep prices or find sub-suppliers yourself and split your order into many smaller ones. This would usually take a lot of effort and time on the buyer’s account. And the other alternative might be even worse. You see what happens is- suppliers would charge multiple layers of mark-up on your parts. Let’s have a look at how this might work:

Steel tubes that must be laser cut in specific patterns, then formed, welded and powder coated are sent to supplier X.

Supplier X Workshop A Workshop B Result
Role
Primary Supplier
Sub-supplier
Sub-supplier
Re-seller situation
Operation done
Laser cut, Bend
Welding
Powder coating
Calculated production cost*
*cost for supplier
15 €/piece
10 €/piece
5 €/piece
Margin by supplier
30%
25%
40%
multiple margins will
be applied
Accumulated cost for
Primary Supplier
15 €/piece
12,5 €/piece
15+12,5+7= 34,5 €/piece
Total:

44,85 €/piece*

when 30% margin
is applied

It is a simplified scenario which demonstrates only one of the ways you could be charged a double margin. And in this specific scenario you could save 5,85 Euro per piece or 15% per piece if you sourced the components directly.

This way, you pay a lot more than you would pay if you went directly to the end supplier. See, this is the reason why it sometimes takes such a long time for suppliers to reply with the quotes. They are waiting on each other to give prices so they can make you a quote.

Until just recently, it was very expensive and time-consuming to seek suppliers yourself. Even when you find a better deal, you spent a lot of time and effort communicating and negotiating your prices so at the end of the day if you don’t produce thousands of units, you will end up spending the same. 

But these days there are various ways to avoid such a scenario. And one of them is Sathive.com a sourcing tool for European manufacturers that are looking to near-shore their goods and services.

3. Overstocking

Overstocking is a rather straight forward point, and it repeats in the stock management and product literature. The more components you buy, the more money you are freezing on your shelves.  And by holding the extensive stock, you also must spend on storage expenses over time.

But things are chaining now. Old ways of shipping thousands of components from the other side of the globe are fading. And to be honest, it was never a winning strategy, to begin with. Now it is as cheap to manufacture in Europe as it is in the far east. We will not deny it that Suppliers in the far east have become so good and efficient at what they do that it is raising concerns how others can keep up. But luckily, we are experiencing a shift in automation that gives smaller and more flexible European manufacturers push their prices down and be once again competitive.

4. Old-fashioned sourcing methods

It is no secret that the way we source right now, through emails and trade shows, has been around ever since the internet was invented. But it has been so long that we have done it this way that we forgot to look for better alternatives.

I usually hear old-school engineers and managers say: “we have always done it this way”. But the old-way is no longer the right way.

4 reasons why you over-pay for parts manufacturing

The global industry has experienced a rapid rise in technology in the past 20 to 30 years, and it is only natural that this innovation impact sourcing as much as any other industry. Due to this exact reason, we have built Sathive. With our tool- the old sourcing routines are replaced with an easy and repeatable process for sourcing. Join Sathive for free now and get the best deals every time.

I hope this article gives you a better understanding of how sourcing can directly affect your costs and the bottom line of your business. This is a very complicated process that has to find a good balance between the trust of people and business opportunity. But as long as both sides get value out of the deal, it is a win-win situation. And that is what it’s all about.

4 reasons why you over-pay for parts manufacturing 4 reasons why you over-pay for parts manufacturing 4 reasons why you over-pay for parts manufacturing

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