It's Not Luck - Eliyahu M. Goldratt [25]
“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