How long will price be king?
Industry leaders warn of a drop in quality due to customers' cost-slashing demands
By Ken Brack -- Industrial Distribution, 8/1/1999
RICE IS KING ONCE AGAIN, particularly in a growing number of integrated supply contracts, which threaten to disrupt the cutting tools marketplace.Increasingly, large end users demand price reductions from their MROP integrators after the first few years of integrated supply deals. Some cutting tool manufacturers and distributors that participate as second-tier suppliers to integrators are alarmed by the fixation on price. A few officials predict the despot will eventually be dethroned if quality suffers.
"I think integrated supply contracts are evolving to where the end user has gotten over the glow of the money he's saving through the elimination of internal purchasing costs," says William Cleveland, president of Craig Tools, Inc. in El Segundo, Calif. "He wants more and he goes back to the supplier and is beating him up on price now."
"The distributor who holds that contract is in an odd situation," says Cleveland. "He's forced to go after the cheaper commodity again. I think you're going to see a real backlash with poor quality being forced back into the chain now because of the push in price."
U.S. Cutting Tool Institute president William Stokey says that in many cases, cutting tool distributor specialists are being forced out of integrated supply contracts by integrators that turn to commodity houses. And when they do stay on as second-tier distributors, cutting tool specialists often are inadequately compensated for the value they bring to the contract. In a recent column published by Industrial Distribution, Stokey suggests that distributors' fears will remain until customers take actions to make sure the expertise they provide is recognized.
"Integrators are not innovators," Stokey says. "They are trying to own the end users' product and don't care where it comes from. They keep hitting us on price."
He also suggests that end users' price-fixation is changing relations among some manufacturers and distributors. In some instances, distributors no longer provide the technical support for cutting tool applications and "manufacturers may have to take over more of that role in some form," says Stokey, who is also president of Allied Machine & Engineering Corp. in Dover, Ohio.
Cleveland agrees relations are changing with integrated supply deals, and says it's not necessarily all bad.
"The distributor is not as protective, he allows us in the door more," he says. "Often if there's engineering problems or a problem with a tool we're called in, or if there's a new item or commodity, we have to sell it. The distributor is too wrapped up with handling inventory."
The president of another cutting tool manufacturer, who did not want to be identified, said that with technical improvements such as improved coatings, spindles and tool geometry, end users can easily lower their overall material costs after spending more initially. He agrees that many integrators - pushed by end users -- are not interested in high end, material-specific tooling that outperforms commodities.
"The purchasing agents that want it at the same price, they're not willing to pay," he says. "But if they pay; they can get better performance."
Other distributors and suppliers avoid this quandary by targeting smaller job shops that recognize the value cutting tool specialists provide.
"I'd say jobs shops are continually looking at ways to improve costs and productivity," says Tom Haag, vice president of sales and marketing at SGS Tool Co. in Munroe Falls, Ohio. "It may take a cutting tool distributor to come in there with a tool that's twice as expensive but lasts five times more and reduces changing times. I'd say once the relationship is established with integrity with tool specialists, they will do just about anything."
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