Target Pricing: Good Idea to Share with Prospective Vendors?

Recently we introduced a potential supplier to an equipment OEM.  The OEM has several fairly large machine parts they want to source to new machining sources.  The desired vendor will be capable of handling thousand pound steel parts, which require complex machining operations.  Not quite 5-axis, but their parts have very intricate details.

Typical machine shops do not have the quality infrastructure to be comfortable with such requirements or size, and since the OEM’s parts are often one-offs, or at least not re-ordered for months, perhaps years, finding an interested vendor has been challenging.  Fortunately for this OEM, this is what Proficient Sourcing does!

So we need a supplier candidate with large part precision milling equipment and sufficient management and quality talent to handle large and complicated parts that might not repeat.  Rather, additional work from this OEM may be another part with similar complexity.

Our most recent candidate has a 80,000 square foot facility to handle such parts, even though they are set up to handle larger volume work.  The article below summarizes this candidate’s capabilities in more detail.

And so we are examining whether or not we have a good match.  The potential vendor has noted these parts are EXACTLY the sort of work they seek, even though the quantities are not optimum.  But they are definitely interested, and we should get some idea if they are going to be competitive shortly.

An interesting subject has arisen in the potential vendor’s analysis of the work, as they requested target pricing.  The OEM responded they do not provide target prices, so the vendor candidate will work up a quote regardless.

Target pricing has proven a barrier in the past.  We have another small shop that simply will not bid on work unless a target price is provided.  The reason is their quoting resources are very limited, and they typically do complicated, multi-station work.  Thus, they are unwilling to devote the quoting time for a new project without first getting some idea if they are going to be competitive.  No doubt they lose some work as a result of this philosophy, but that is a risk they are willing to take.

In the large part case currently under consideration, the shop is proceeding without a target price.  We know the OEM does not usually offer much price flexibility and has driven a tough bargain with other shops we have introduced. 

We have no strong opinion about whether or not an EOM should offer target pricing.  We have not dealt with many OEM’s that volunteer target pricing, so our experience is very limited.  But we are aware that there are several significant pros and cons, and among them are these.

  1. Obviously a target price could result in padding by the vendor in the case where they can do the work for a much lower cost. 
  2. A target price, lower than the potential vendor would bid, might create a search for improvements in processes that would otherwise be uncovered.
  3. A target price might discourage an otherwise excellent potential vendor from even bidding, either because the initial evaluation indicates the target is too low, or low enough to discourage further quoting effort.

There are 2 different circumstances that could make a big difference.  First, if the OEM has experience with the work being quoted by a new prospective vendor, the chance of a major price reduction is probably remote, so offering a target price might be constructive.  On the other hand, if the work is something new, or almost so, the knowledge of price history does not exist.  Target pricing is probably not appropriate in this case.

We would be very interested in your view on this subject.  Please contribute to our blog.  Target pricing comes up once in a while, so your input could be very useful.

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