quoting 7 years in advance!
Discussion
Been asked to complete an RFP for a supplier by Friday; they service / maintain large industrial facilities and we supply them with parts (less than £75k per annum over last 3 years).
One thing they've asked for is pricing for the next 7 years for the parts we supply - with % reductions year on year.
I understand they're trying to win a long term contract but I cannot guarantee my prices for 7 years - let alone consistently show a price reduction.
Is this normal?
One thing they've asked for is pricing for the next 7 years for the parts we supply - with % reductions year on year.
I understand they're trying to win a long term contract but I cannot guarantee my prices for 7 years - let alone consistently show a price reduction.
Is this normal?
If you manufacture parts is there any sort of index you can track, so if parts are 10% above index now, then reduce 1% per year so at end of the period they are 3% above index. So if the index rockets so your costs rocket then so does the price.
e.g. Oil price, Copper, Steel etc all have indices.
And then add inflation clause as well as suggested above.
e.g. Oil price, Copper, Steel etc all have indices.
And then add inflation clause as well as suggested above.
It doesn't seem unusual to me if your customer is in turn tendering for a 7 year contract, as it's understandable they'd want to minimise uncertainties as much as possible, but the notion that you'd give them a price that decreased year on year seems very odd. Are you sure they're not asking for you to quote for a percentage increase? 
arfursleep said:
Been asked to complete an RFP for a supplier by Friday; they service / maintain large industrial facilities and we supply them with parts (less than £75k per annum over last 3 years).
One thing they've asked for is pricing for the next 7 years for the parts we supply - with % reductions year on year.
I understand they're trying to win a long term contract but I cannot guarantee my prices for 7 years - let alone consistently show a price reduction.
Is this normal?
Is this something you make yourself or you buy in? How important a customer are they?One thing they've asked for is pricing for the next 7 years for the parts we supply - with % reductions year on year.
I understand they're trying to win a long term contract but I cannot guarantee my prices for 7 years - let alone consistently show a price reduction.
Is this normal?
Kermit power said:
It doesn't seem unusual to me if your customer is in turn tendering for a 7 year contract, as it's understandable they'd want to minimise uncertainties as much as possible, but the notion that you'd give them a price that decreased year on year seems very odd. Are you sure they're not asking for you to quote for a percentage increase?
We normally sign 5 year contracts with break clauses and ask for annual reductions but we're buying services rather than physical products so we assume some efficiency savings on their side that they can share with us.In the days of the CEGB, showing age, there were clear clauses and agreed formulae to allow price increases, or in theory decreases, based on accepted formulae.
Bearing in mind construction of a major project, eg Drax PS, took place over many years and stages. If you are quoting for equipment to go in all 6 boiler sets you both need something like that, or even just 3 sets in one of the two stages. First stage started 1973, second stage started 1985.
Formulae looked at many indices, currency, wages, price increases, raw material market indices being just a few.
Bearing in mind construction of a major project, eg Drax PS, took place over many years and stages. If you are quoting for equipment to go in all 6 boiler sets you both need something like that, or even just 3 sets in one of the two stages. First stage started 1973, second stage started 1985.
Formulae looked at many indices, currency, wages, price increases, raw material market indices being just a few.
Thanks all for input so far. Yes, this is for a manufactured product.
I checked with the buyer re the pricing structure;
Me - Contract commences next year for 7 year so prices quoted now are expected to remain fixed at worst but at best, drop over that contract period?
Them - Yes. To win this bid, we will need to submit pricing more competitive than we give to our customer today. We require our supply chain to support us with this endeavor.
This business is worth max £50k per year for the 7 years and that is around 1 - 1.5% of turnover and about the same % of manufacturing output per year.
They don't have a second source for this product but it's critical to operation. The chances of another company stepping to manufacture are very slim given small volume of product and that we own the IP on the product.
We could use tracking on a material index to base costs but as they've already stated costs must go down over time not up, I don't think this will be accepted.
I'm going to submit a price for the parts which is higher than current and advise that if we don't increase year on year then we're effectively taking a 2-3% cut every year anyway as that's average RPI increase for materials, utilities, labour.
I checked with the buyer re the pricing structure;
Me - Contract commences next year for 7 year so prices quoted now are expected to remain fixed at worst but at best, drop over that contract period?
Them - Yes. To win this bid, we will need to submit pricing more competitive than we give to our customer today. We require our supply chain to support us with this endeavor.
This business is worth max £50k per year for the 7 years and that is around 1 - 1.5% of turnover and about the same % of manufacturing output per year.
They don't have a second source for this product but it's critical to operation. The chances of another company stepping to manufacture are very slim given small volume of product and that we own the IP on the product.
We could use tracking on a material index to base costs but as they've already stated costs must go down over time not up, I don't think this will be accepted.
I'm going to submit a price for the parts which is higher than current and advise that if we don't increase year on year then we're effectively taking a 2-3% cut every year anyway as that's average RPI increase for materials, utilities, labour.
Here's an incredibly crude calculation:
Year 1 sell price £100. After 7 years with 5% price rise per year you need to be selling for £134. (5% because you're having to cover the risk). If they want 5% discount per year, the year 1 sell price is £182. It's high, but that's what they are asking you to do (or make a loss).
Don't you just love the power of compounding.
Of course you might want to adjust by 5% (or whatever) of the cost price rather than the sell but I don't know those numbers. Post some other numbers & we can recalculate.
Year 1 sell price £100. After 7 years with 5% price rise per year you need to be selling for £134. (5% because you're having to cover the risk). If they want 5% discount per year, the year 1 sell price is £182. It's high, but that's what they are asking you to do (or make a loss).
Don't you just love the power of compounding.
Of course you might want to adjust by 5% (or whatever) of the cost price rather than the sell but I don't know those numbers. Post some other numbers & we can recalculate.
The way I look at this is that in order to win the bid they need to offer starting off at a lower price than they are offering today for, say, single contracts. Then going forward for 7 years offer further discounts, or at worst hold that price in a fixed price contract for the 7 years, ignoring inflation.
Obviously only the OP knows what his profit level on the business is, whether it can withstand, firstly any discount on existing price levels, that's before you get to fixed price or further discounts.
It gets to a point where either you have to walk away or bite a bullet in order to gain further business on the back of what may only be contribution level work, ie non profitable but covering variable costs and contributing to fixed costs.
Obviously only the OP knows what his profit level on the business is, whether it can withstand, firstly any discount on existing price levels, that's before you get to fixed price or further discounts.
It gets to a point where either you have to walk away or bite a bullet in order to gain further business on the back of what may only be contribution level work, ie non profitable but covering variable costs and contributing to fixed costs.
FiF said:
The way I look at this is that in order to win the bid they need to offer starting off at a lower price than they are offering today for, say, single contracts. Then going forward for 7 years offer further discounts, or at worst hold that price in a fixed price contract for the 7 years, ignoring inflation.
Obviously only the OP knows what his profit level on the business is, whether it can withstand, firstly any discount on existing price levels, that's before you get to fixed price or further discounts.
It gets to a point where either you have to walk away or bite a bullet in order to gain further business on the back of what may only be contribution level work, ie non profitable but covering variable costs and contributing to fixed costs.
It's 1% of the company's annual business. It's simply not worth making poor profits on & carrying the risk of cost increases - you'd be better off spending the effort in getting new clients than battling with one who wants you to reduce your profit margin every year. If they agreed to funding 7 years worth of product manufacture in year 1 then there might be room for negotiation (the OP could probably reduce costs that way) but that's very unlikley.Obviously only the OP knows what his profit level on the business is, whether it can withstand, firstly any discount on existing price levels, that's before you get to fixed price or further discounts.
It gets to a point where either you have to walk away or bite a bullet in order to gain further business on the back of what may only be contribution level work, ie non profitable but covering variable costs and contributing to fixed costs.
arfursleep said:
This business is worth max £50k per year for the 7 years and that is around 1 - 1.5% of turnover and about the same % of manufacturing output per year.
Based on the above you've already carried on the conversation with them longer than I would have done.I'd be filing this in "not worth the aggro".
Mr Pointy said:
It's 1% of the company's annual business. It's simply not worth making poor profits on & carrying the risk of cost increases - you'd be better off spending the effort in getting new clients than battling with one who wants you to reduce your profit margin every year. If they agreed to funding 7 years worth of product manufacture in year 1 then there might be room for negotiation (the OP could probably reduce costs that way) but that's very unlikley.
Don't disagree with any of that, but think it still depends on information that only the OP has regarding current profitability of this business and potential going forward.Having said that it would have to be very good business now, which it doesn't sound like it is but that's my prejudiced view without any foundation. Plus it's possibly thin end of the wedge and signals to customer and his customer that they should just keep trying it on. In which case at some point he's going to get to the point of telling folks to do one.
arfursleep said:
We require our supply chain to support us with this endeavor.
We (electronics) get that all the time. Along with thinly veiled threats that if we don't 'support' them then we won't be invited to bid for other business. Prices in our business do tend to fall (look how cheap most electronic things are) but often they're looking for quarterly reductions.Unless your gross margins are enormous, 7 years is bonkers though - anything could happen in that time.
If you're sole-source and own the IP, why would you discount at all, especially if there's no bigger picture opportunity? You owe it to your business to extract the maximum value possible.
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