On sharing cost information with customers

John, the bright young hardwood sawmill manager, was sharing with me the wisdom he had recently gleaned from a consulting “futurist” at an association meeting. Lean, low-cost, supply-chain, were among the terms he repeated several times in his conversation. I knew the territory fairly well and was pleased to hear him preaching to the choir, and nodded pleasantly in agreement. But suddenly, he hit a sour note.

“The futurist asked who shared his costs with his customers. Nobody was raising their hand, so I spoke up and volunteered that my customers can see any cost of mine they want. It’s all a part of being the easiest supplier to work with.”

Normally, I would have let the point pass without comment, but I had been through this game before, and I like this fellow well enough to try to raise a small red flag for him to ponder. Using sawmill vernacular that can’t be repeated in this TechNote, I let him know that he was making his business awfully vulnerable to customers that might look like great catches now, but may more closely resemble piranhas in the next couple of years.

One large wood industry corporation that I know of signed an exclusive supply contract with an industry retail distribution heavyweight a few years ago, and at the time it was hailed as a major triumph for the company. Just thirty months later, however, that contract had become a huge anchor pulling the business slowly but surely under. The customer had come to know so much about the supplier’s mills and costs that every last cent of profit had been squeezed from the supplier, and business transaction costs had made that customer an over-weighted loss leader for the business.

Another large company in the same business holds a different attitude toward sharing information with suppliers. It cooperates 110% with its customers on sharing win-win information such as improved scheduling and delivery data, and real-time product-specific quality data. But cost data is held in confidence, and though some savvy customers occasionally try to wrangle the supplier’s costs out of them, they politely but firmly resist that intrusion.

The difference in approaches is one of confidence in their businesses. Sharing cost data with customers is a weak substitute for good salesmanship and great products. Customers these days, empowered by supply-chain gurus and consultants, feel they have the right to demand to know everything about their suppliers. Unable to effectively control their own costs, they think they can be more successful by controlling yours. Well, they do have the right to demand it, but you, as a supplier, also have the right to refuse that demand. Offer them instead top-quality products with real-time documentation to prove it, thereby relieving them of expediting, quality control, and re-work costs. Offer them the best selection of products they can obtain, with packaging and delivery options tailored to their logistical needs. Offer them personal, top-notch technical service to support their use of your products. If they still insist on knowing your costs – well, you can give in and get that business, or you can pass. After all, they’ll eventually come back to you when they run that other guy out of business.

Chuck Ray, Ph.D.

Penn State Wood Products Operations Specialist

mailto:Cdr14@psu.edu