By Jerry Fulkerson
Raise your hands. Who likes to walk into a new car dealership and drool over a new SUV or truck? Close your eyes and imagine opening the door and slipping behind the steering wheel while that irresistible new car smell wafts around the cabin. Conjure up the feeling of playing with the controls or exploring the state of the art entertainment and communication system. Envision yourself popping the hood to look at that pristine engine just waiting for you to turn the key and bring it to life. Are you focused on that mental image? Good, who’s in?
That’s what I thought. Now, let’s move on a bit. We’ve decided on the vehicle that we want and the options we need, including the navigation system that has all the Dairy Queen locations pre-programmed. Suddenly, we feel a tap on the shoulder and turn to find a salesman with an outstretched hand grinning at us. “What’s it going to take to get you in that new truck today?” He asks as he motions us towards a desk. Who’s still in?
That’s about what I thought too. The truth is, nearly everyone likes to look at a new vehicle, but very few enjoy the negotiation process attached to buying one. There are a lot of reasons for that reluctance. But, the biggest irritant is that, when the negotiations are over, most people can’t tell whether or not they got a good deal. Engineers are like that sometimes when buying a new machine and we’re going to talk a bit about that today.
There are two components to negotiating the deal for a machine. The first one is getting the quote in order. It should contain everything that you need and nothing that isn’t essential to a successful project. Getting the quote right is the responsibility of the project engineer and his team. So, let’s talk about taking a final pass at the validity of the quote because that quote is our starting point for negotiations.
In the previous post we talked about getting the options correct and identifying whom would be responsible for what in a turnkey project. This is the time when we make sure that all the additions and corrections we requested were made to our satisfaction and that there aren’t any hidden Easter eggs in the fine print. Every project has specialized requirements, but this is a basic check list of items that always needs verified:
- The base machine is correctly identified and all standard features noted match what we and the sales engineer have discussed. The cost of the base machine didn’t change.
- All needed options all included and the cost is consistent with previous quote revisions.
- No unneeded options slipped in.
- Any special modifications that we have requested are included and either have a price associated with them or are noted “No cost”
- Any items that we specified that we would supply, work holding, perishable tooling, programs, etc., are noted clearly and prominently with a no cost charge.
- Any run-off requirements are carefully and accurately detailed.
- If our company has a machine tool specification standard, that standard should be acknowledged and conformance to that standard should be specifically agreed.
- The lead time for delivery should be noted and match what we had expected. If our company has delivery delay penalties, those should be noted and the builder should indicate that they are accepted.
- The FOB point and who is responsible for shipping charges are noted and as agreed.
- Read the boiler plate commercial clauses in the quote to ensure that there is nothing unusual there. Common areas of concern usually revolve around payment terms or retained interest in the machine by the seller. If you find something unusual and need guidance, your CFO is usually a good back stop.
Now we get to my favorite part of the quote, fees and special charges. Some fees and charges are unavoidable, some can be negotiated and, I firmly believe, some are there solely to give you something to complain about so that you can feel better when they are eliminated. I’ll list some of them here and how I typically handle them, but be aware that machine tool builders are constantly coming up with new ones. I think they have a special department for that.
- Engineering charge – If the machine tool builder is doing special design work for the project such special automation, in-process gaging, or a machine modification, then a charge is warranted. But remember that all of those types of items have a separate hardware charge; my position is that the engineering fee should be built into that. If they are doing something that is purely engineering, like developing a process sheet or writing a program, the charge should include those details. Also note that engineering charges are negotiable. I usually cut them in half and see where that leads.
- Project management fee – No, just no. Never paid one, never will.
- Purchased Item Charge – Let’s say we agreed that the builder would supply the perishable tooling. This charge isn’t for the tooling itself; that’s covered as a separate line item. This charge is to recoup the expenses of THEIR buyer writing a purchase order for that tooling. The builder is already adding a markup to the tooling and now they want us to pay part of their Buyer’s salary? No, just no.
- Documentation fee – Typically this has something to do with import documentation, although I have seen it used to charge for putting together the machine delivery documentation. This should be considered part of doing business and built into the base machine price. No, just no.
- Machine set up charge – I don’t have a problem with the builder charging for a machine set up with a turnkey purchase. I do have a problem with what they usually charge. I’ve seen a $10,000 charge for a setup that shouldn’t take more than eighteen hours of actual time to complete. Make sure that the cost quoted is appropriate for the work needed and don’t be reticent about using aggressive negotiations. No light sabers though.
- Machine run off charge – The same rules that applied to the set up charge apply here.
- Capability study charge – No, this should be included in the run-off charge.
- Metrology charge – No, this should be included in the set-up charge.
- Customer supplied materials handling fee – This is a new one that I’ve only seen one time. The builder wanted to charge $700 for opening each box and installing the work holding and tooling on the machine. I actually had fun telling them that wasn’t going to happen.
- Rigging fees – The machine tool builder or distributor pays on their end and we pay on our end.
- Installation charge – This is a legitimate fee, but I tend to like to have it on a separate purchase order so that I can get a detailed breakout of the costs. I find that keeps them more reasonable.
- Training fee – I don’t have a problem with this one in theory, but it’s usually one that is a good negotiation point at the time of purchase. If you get to a sticking point on price, the builder or distributor will often offer the training for free as a carrot to seal the deal. This applies to programming, operation and maintenance training programs.
At this point we should have a quote with everything in order. The problem is that the corrections are likely in red ink. Some engineers will continue on to the commercial side of the negotiations with a marked copy. I definitely won’t do that if I’m handing off to a buyer or executive; I want them to have a clean quote. I usually don’t do it even if I’m handling the final price negotiations myself because it doesn’t work well into the way I negotiate. My advice is to let the sales engineer take the time to provide a final correct quote. When he returns, we’ll finish negotiations and tie a red bow around the order.
Side note – We have to do the quote verification process twice because we need to go into the final negotiations with a legitimate second choice. We should pick another machine from the PAR worksheet that has a score close to the one that we designated first choice and get that quote in its final form too. That’s another reason to let the sales engineer leave and return tomorrow with a clean proposal. It gives us time to get our second choice set.
The second component of negotiating the deal is getting the price right. Who handles that varies from company to company. In large companies, the commercial end of the deal is nearly always handled by a professional buyer. His or her title might be Procurement Manager, Sourcing Specialist, or Purchasing Director, but the reality is that they are the BUYER and there is a sign hanging over the door to their office that says:
Abandon All Hope Ye Who Enter In
This person has one purpose in life and that purpose is to get the best price and terms for whatever is being purchased. Every buyer has their own methods and this old country boy wouldn’t presume to try to explain or critique them. The sign over their door pretty much says it all and that’s a good thing for an engineer managing a project with a tight budget. As the project engineer, when we are happy with the quote, we’ll make that long walk to the Buyer’s office, shake the sales engineer’s hand, flash a sympathetic smile and then turn a walk away. I always say a silent prayer that he survives. I truly hate breaking in a new sales engineer; it takes so long to train them properly.
In a small or medium size company negotiating the purchase might be the responsibility of the engineer or it might be left to someone on the executive team. If the owner or president of our company is handling the commercial part of the purchase, our responsibility is to verify the quote and then accompany the sales engineer to the executive’s office where we’ll answer any questions that come up and watch as the deal is made.
The third possibility is that Engineering is going to handle the final negotiations. For the most part, I like that option, but this is where personal comfort levels with price negotiations come into play. Negotiating a price doesn’t have to be unsettling. If you approach it with the proper mindset, that being that this is a competition, it can even be fun. Here’s my method.
In that day or so while the sales engineer is making the final corrections to the quote, I spend some time putting together a list of talking points that might justify a lower price. Some might deal with future expansion plans or other new projects we have in the works that might be attractive to this machine builder or distributor. Those are the carrots. Some might come from the PAR worksheet we completed and deal with features or benefits in which the competition excelled or this machine of choice stumbled a bit. Those are the sticks. If we get to a sticking point in negotiations, we pull out one of these carrots or sticks.
When our friendly sales engineer returns and we have that final quote in our hands, we’ll flip to the page where all of the costs are totaled and a final price is shown. Let’s say in this case that the number is $375,000. In most cases, right below that will be the verbiage “Special price for ABC Enterprises” or “Discount price until May 1, 2017” and another, lower, price. For example, that lower price might be $309,000. $375,000 was an inflated list price that virtually no one pays and, in this case, they are offering us a 17.5% discount. How big that initial discount is depends on a variety of factors, but typically it runs between 10% and 25%, so the 17.5% that they are offering is middle of the road.
This is the point in time where I calculate where a 27% discount would put the price of the machine. I use 27% because 25% is about the best I ever get. With that number, we look at the sales engineer and say, “I can give you the purchase order right now if you can give me the machine for $274,000.
When we used the phrase “purchase order right now,” the sales engineer sat up a little straighter and his eyes started to dilate a bit. When he heard $274,000, he grabbed his chest feigning a heart attack. If he’s good, he’ll smile and reply, “That’s funny! For a minute, I almost thought you were serious about the price. Tell you what, I have to get it cleared, but we might be able to drop to $305,000.
And the dance starts. He lowers his price and we throw out a stick. He hesitates lowering and we throw out a carrot. If we have too, we grudgingly raise our offer just a little. I can’t tell you where it will end, because each machine, each project, is unique. What I can say is that, if he stops lowering the price before he gets to a point where you’re comfortable then you have to be ready and able to stand up from the table, smile, shake his hand and say, “I don’t think we’re going to do a deal today.” This is the point where we need that viable backup plan because an experienced sales engineer can look in our eyes and know whether he is at risk of losing the sale. We want him to know that we have options.
Whether he sits back down at this point and starts negotiating further or not, sooner or later, the dance will end and we’ll either have a new machine on order or be calling our backup option to negotiate a deal with them. The odds are that we will have ordered a machine. I can tell you that I’ve only gone to my backup three times in thirty-five years.
There’s one final point that I want to make. Buying a machine tool is different from buying almost anything else. Most of the time when I buy something in my personal life, it’s just that one deal and I may never see or need the salesman again. It’s not that way with machine tools. I need that sales engineer for a lot more than one sale. I want him to bring his expertise to the table the next time that I have a difficult project. I want him to take the call at 4:45pm on Friday afternoon when I have a problem and the machine has to run over the weekend. I want him to call me on the phone when he has a new model to sell that might make my next project a slam dunk. I want his company to be in business when I need them. So, while I have a fiduciary responsibility to my employer to minimize our capital and operating costs, I also have a responsibility to preserve a good working relationship with the folks who help provide the tools we need to work safely, produce quality products, and ship those parts on a timely basis in adequate quantities. Buying a machine tool should be a win-win for both sides because, in the long run, we’re on the same team.