What Would You Do (WWYD)?
Sep 23, 2013
Have you ever seen this show on ABC? I love watching it with my children because it always presents a scenario that forces you to make a choice. Which path is the correct one?
I recently had lunch with the owner of a successful manufacturing Company and a long-time client. I will refer to him as “Sam”. The Company, including its accounting and operations, runs like a well-oiled machine. To translate, it runs very lean and very profitable. Sam recently hired a Controller after a long search for someone who had significant cost experience. The new Controller also joined us for lunch.
We spoke in great detail about how they were costing products and the increased visibility the Company has been facing as a result of being a supplier to the automotive industry. Sam indicated that he recently received a RFP (Request for Proposal) with a twenty-four hour response deadline. We all know what these are and how they work, but Sam said his company had been receiving more and more RFPs similar to this one which already mandated the costs from materials all the way down to the burden rate to which they were limited.
What would you do if you received this RFP? What would you think? Is the customer desperate? Or does this particular customer know your costs better than you do? For Sam, this was an easy decision. He already knows his costs and was able to quickly discern that the mandated costs were unattainable in order to maintain a decent profit margin. For me, the outside observer, this immediately brought two questions to the table.
- If Sam’s company, which I have already defined as very lean and very profitable, could NOT meet the demands of this RFP, who realistically could and still make money?
The answer: NO ONE. That is why this potential customer was operating on such a tight deadline and using high pressure tactics. The former supplier did not know their costs and was run out of business, and the next company to accept such rates will be too.
- How can you make these decisions quickly and accurately for your company if you don’t completely and readily know your costs?
The answer: YOU CAN’T. You cannot make these decisions with any quickness or certainty if you do not have an accurate cost structure, and you may be the next one to be run out of business.
So, with all that in mind, let’s change from What would you do to What Should You Do? 1. Know your costs: take the time to build, update, test and reconcile your cost model. 2. Understand the cost model: make sure it makes sense and mirrors the reality of your product structure and the costs that are being incurred. 3. DON’T accept the mandated costs in the RFP unless you know they fit into your cost model
Categories: Cost Accounting