We have a client that does manufacturing for a very large aerospace company, almost exclusively under multi -year contracts that guarantee a steady flow of work – at fixed prices during the life of the contract. That contract is currently in negotiation to be extended, at the urgent request of the customer, who would very much like to lock in fixed prices for up to 7 years into the future by extending the contract life from its normal 3 years through 2030. The customer in question is our client’s largest customer by far, easily tipping the customer concentration scales into risky territory. But on the flip side, the company has been making product for this customer for over 40 years, and the relationship has been strong and mutually beneficial – until now.
We suspect that our customer – whose main customers are the folks who make all the planes and weapons that we read about flying, not flying, and shooting at Russians in Ukraine – is being pressed in the same way by their customers, all in an effort to get someone else to take on the risk of inflation’s impact on margins. If you can get your suppliers to eat most of the price increases, it gives you more leverage to absorb similar hits from your customer. Until you get far enough down on the food chain that there are no more layers to push those risks down to.
It’s clear to us – and we think clear to our customer too – that costs are rising faster than the historical norm, and will continue to for the next few years at least. Fixing prices at today’s levels, or even worse, by extending the prices in the current 3-year old contract, will pretty much guarantee shrinking margins for our client through the end of the decade. How that will affect the viability of the business, let alone a fair return for the normal risks of running a business, is not hard to predict, even if not down to the last decimal point.
So, what’s my point?
When do you push back to your customer’s unreasonable demands – even if they are one of your largest customers? Here are my thoughts for your consideration:
- Is your customer being reasonable with their requests? Or are they making demands because they think you can’t afford to lose them?
- Can you afford to lose them? Is their business essential to your company’s survival? If this is your assessment, call a doctor immediately. I mean us, of course.
- Is your product easy to obtain elsewhere? Can it be purchased by your customer for a price that is lower than the price you want or need? If so, what are your competitors doing that works better than what you’re doing?
- Who needs who more? Sometimes the product you produce is essential to a key element of your customer’s business, and they need to keep it coming. Then it’s possible that they need you as much (or more) than you need them.
On that last point, if you are in the position of our client, where the need is mutual and not easily replicated elsewhere, it may be time for you to say NO. In our experience if managed well, this strategy can result in a win for your company and a more reasonable business approach from your customer. We’ve helped our client do this before, so we know how it works. After all..
We are Your CFO for Rent.