Coping With Price Pressures

For Manufactures Only

Coping With Price Pressures

By Richard Rowe

April 2001

One manufacturer spoke with such feeling about the subject of price pressures that we let him have the column all to himself for this issue. Although we have retained the author's anonymity, we can say that he represents the U.S. arm of a well-known European and now U.S.-based manufacturer of 400 Hz ground power products. Whether readers scream "genius" or "idealist", I'm sure that many will share his hopes and frustrations. GSE Today looks forward to the response from both sides of the buyer/seller fence.

I believe the theme of this issue’s new For Manufacturers Only column provides an excellent opportunity to express some of our hopes and vent the frustrations involved in developing and offering quality GSE products that not only meet, but advance, the basic desires of the airline customer. Our goal is to move forward with the evolution and advancement of our products, yet remain competitive and keep within the company goals, image, and profit guidelines.

Too often, I have seen pricing pressures cause problems for both consumers and manufacturers--problems that could have been eliminated, or should never have been allowed to become a factor, if only the bidding processes practiced by many airlines were different. They are problems that were more detrimental over the long run to the airline customer than to the manufacturer.

It's an old cliché, but one can't expect the very best for the very least. If you do so as a customer, you're kidding yourself, and if you do as a manufacturer, then it will come back to haunt you. I have been directly involved in the sales of GSE products for the past 20 years. Prior to that, I was a military flier of multi engine jets for 20 years. It's possible that you will find my solutions to the pricing issue somewhat idealistic, but, if implemented, they would lead to a more equitable, realistic, and practical end result for all concerned.

The GSE industry supports a high-tech service that depends on safety and reliability for its success. However, it is an environment that can quickly become dangerous if manufacturers and airlines do not supply, demand, and utilize the safest and most advanced technology available to them. The fact is that GSE products are directly depended upon to support the extremely expensive key ingredient--the multi-million dollar aircraft. Let no one forget that GSE can make or break the ultimate outcome of the image, service, profit, and safety of an airline's operation.

I think, or rather hope, that today's sell price pressures exerted by buyer airlines is starting to change. Hopefully, there is now the realization that safety, quality, reliability, overall true cost of ownership, and the supplier's actual support capability is more important then just the lowest price (which normally is only a few percentage dollars difference between the GSE competitors).

In the past, the only consideration by an airline was based on the lowest price. Consequently, the evaluation process (if there was one) conducted by the airline's engineering group was disregarded. The final decision was made on price alone by a buyer who was normally unaware of the considerations of the airline's technical group or of what impact the lower cost product might have on the airline's overall operations and costs.

I can 't speak for all GSE product manufacturers. However, products that I have been associated with (400 Hz power and air systems), plus the various manufacturers' product capabilities, reliability, quality and support, differ as much as night and day. The cost-to-build price was not the real sell price determining factor. It was competition, because the sell price pressure would make the sell price differences minuscule. However, the real measurement factor is the manufacturer’s design and engineering capabilities, financial resources, experience, R&D budgets, corporate strategies, goals, principles, scruples and leadership, which all have a major impact on what kind of product they design, what is produced, and how it is priced and supported.

Each manufacturer might use the same general nomenclature to describe a particular product, but the technology used, features included, true quality, overall reliability, genuine product support capability, and the real cost to produce their products, can and does vary greatly.

Most airlines contract a third party A& E to determine the product's specification. This results in an RFQ/tender with a vague specification that consists of a conglomeration of excerpts from various manufacturers' product literature (whether true or not) about their capabilities or features. The tender ended up calling for a piece of equipment that was either technically impractical/unrealistic, did not exist, or could not be met completely by any one, or worse yet, by just by one questionable manufacturer. In some cases, the tender specified a system or product that was not even properly designed or suited for the application. You don't ask for a motor cross jeep when you want to drive the autobahn at 200 mph, or ask for a Mercedes to run the Baja. It is like an airline asking for an airplane with a Boeing fuselage, Airbus wings, a MD landing gear, and Lockheed tail section. All of which must travel through the air at 1,000 Knots per hour, fly around the world without refueling, and be propelled by solar cells. After all, the parts and technologies do exist, so why can’t you put them all together, and don't you dare take an exception to the spec or we’ll disqualify you.

In many cases, the writer of the spec is either not the end user, or up-to-date on what is available on the market. Many are not specialists on that product, or were just trying to be fair by including everyone in the spec. Worse yet, they could create a situation that might be construed as being politically influenced or simply used to drive down the end sell price.

The real technology specialists are the manufacturers' design engineers, not a general product spec writer or the over worked airline GSE manager. The airlines need the very best technology to support their aircraft and keep their GSE departments running smooth. But, in many cases, they are forced (by the lowest price pressures) to accept equipment that is technically unsuited and/or gives them nothing but trouble, costs more in the long run, and can ruin their image or on time departure record.

So, what is my suggested solution? First, it would be in an airline's best interest to have their GSE managers and experienced engineers (or their A&Es) thoroughly investigate the products available by visiting a manufacturer's facilities on a regular basis. Then, qualify each manufacturer's capabilities in terms of their technology, special features, and performance capabilities. They could then better understand whether it is indeed a quality product, confirm that the equipment can do what the manufacturer says it can, and determine how much the product would cost to maintain.

Then, just maybe, the airlines could save some money. Find out if the manufacturer offers a complete maintenance and service contract which would guarantee a product’s performance for many years. Believe it or not, companies like this do exist. I know because I work for one. The airline should also look at the manufacturer's years of experience in that technology field, although longevity alone does not always mean they have kept up with the latest technology advancements or have the support infrastructure in place. Airlines should evaluate the manufacturer's financial resources and stability, as well as product support capabilities and general business practices before they begin to consider their products. A second step would be for the airline to determine their real operating requirements for that product. Also, take into consideration both the standard and optional features and determine the benefit they can provide in terms of safety, reliability, and ease of management.Airlines and A&Es should not tell the manufacturer how to build the product or what technology to use, and certainly not what parts to use, because then the customer becomes the novice design engineer and is unlikely to request a product with the best design features.

The airline should specify the results they want, but not how the manufacturer should achieve them. New technology and special features evolve every day. Applying restrictions is counter productive and the airline most likely would be ignoring things they may want to consider or have their equipment provide. Also, don't discount or discriminate against a manufacturer based on country of origin. There are many superior products on the market that are designed and produced in different countries around the world, yet offer high quality, excellent support, and very competitive prices.

Thirdly, when the airline has a requirement they should request each of the product manufacturers to provide then with an honest specification of what they have to offer, accompanied by an explanation of why they have designed it that way. Get them to include their recommendations, suggestions, and optional features.

The airline should then assemble a knowledgeable evaluation team consisting of the airline operators, the A&E and their own engineers, and chaired by the airline’s GSE manager. They can then digest all the information to get a clear understanding of exactly what each vendor has to offer. Then, invite those manufacturers which meet the overall company stability qualifications, and have these potential suppliers explain their technology in detail.

The technical evaluation group would then select what they believe to be the best or most technically desired products and ask for a realistic price for the quantity of product which the airline is considering (project or blanket requirement).

Then, it’s up to the customer's technical committee to determine, purely on a technical basis, which product they need or want to support their operations and aircraft and, based on the budgetary price, see if it falls within their general budget constraints or allocations.

Once they have decided on which product they want technically, the airline’s purchasing group, with the technical group present, calls in the technical first choice and they negotiate with the manufacturer for an equitable price for the particular quantity and level of support. If the product and manufacturer meets all of the customer's criteria--company stability, technical superiority, product support requirements and price--they place an order.

They don't call in the second choice and pit one against the other to get the lowest price, because there are still very big differences between the various products. The engineering group chose a product for a reason. Naturally, if they can not come to an agreed price with the favored product manufacturer, then the decision should go back to the technical committee for their evaluation and determination of whether the first choice's price is worth it or not. If not, they select a second choice and so on.

The main objective is not to have the final decision based on price alone and just forget about the technical needs. If products are chosen in this way, then both parties know exactly what is expected and what they are getting. A purchase order/contract can be drawn up and signed--one where the manufacturer's feet are held to the fire to perform according to their claims, and one where the customer does not make additional demands or expect more than what was agreed to for the price offered.

It takes a little time and effort but eliminates many, if not all problems. Not least, it ensures that the airline gets what it pays for.