A price cut too far?

There are many great negotiation stories my father used to tell, but the one that I always remember was about a defence engineering firm, that built rockets for the MOD.  Their team of buyers would work hard to get the best possible price for the thousands of component parts that made up each rocket, and often they were very successful at it.

Sometimes, though, they were so focused on price they allowed other issues to slip.  When my father was touring the factory after a meeting with the Board, the Director of Procurement told him that just last week he had had to instruct his buying team to negotiate the price up for one of his parts.

“Up?” asked my father, rather incredulous.  “Yes up, they were far too cheap,” repeated the Director.

It was a small widget, and they used around 1000 per rocket.  It was the cheapest component, and it performed a small, but important, role in the overall design.  The Buying team had got the price down from 82p to 25p per piece, saving them hundreds of pounds per rocket.  The suppliers had been eager to keep the lucrative contract, so under price pressure they had caved and lowered their prices on the widgets.  However, with the success in price reduction came a reduction in quality.  The widgets looked the same, fitted the same, but were often made with slightly inferior metal – so that the supplier could keep their prices low and still be able to make a profit.

The knock-on effect was that failure rates in the finished product for the MOD were much higher, and the time and expense it took to refit a broken widget in the rockets was huge (several thousand pounds per rocket).  The servicing and maintenance costs for the company were climbing astronomically making the whole defence project unviable.  The simple solution was to make sure that the quality was there at production level, reducing costs further down the line, and the way to do this was for the buying team to take the pressure off the price, and get the quality back up.  Eventually, after several rounds of negotiation both parties were happy with the new price of 52p per widget.

Have you ever negotiated too far and found that the product or service you bought didn’t match expectations?  Sometimes we have to remember that cheap doesn’t always mean good value.