Repeat after me: It’s time for a price increase.
I have always hated the term "business model" because business is not a model. Business is a real-world activity that enables people to have a livelihood.
Still, my banker, accountant and lawyer keep telling me that the business model of our industry is just plain lousy! The two reasons they all quickly offer to support their position include the inability to control pricing and a total lack of respect (e.g., loyalty) from customers. (They never mention Asia, foreign competition or global overcapacity.)
This haunts me, especially when I talk to my inside sales guys. I am sure that much of their effort amounts to being nothing more than a market maker competing for phantom orders that end up being placed by customers who "respect" the moment rather than the relationship. Of greater concern is the reality that material costs have skyrocketed over the past quarter and yet the business model of our industry is still skewed toward ever lower pricing rather than the manufacturer's ability to control pricing and maintain margin.
The reality is that our industry is not a model, but people who are constantly facing challenges and opportunities. Our goal is to be successful as measured by profitability, satisfied customers, engaged employees and rewarded investors. The reality is that at some point people in our industry need to start focusing on the reality of their business rather than any so-called business model.
Reality is often in the eye of the person searching for it. In my eye the reality is first that raw material costs are going up at a healthy annual clip, around 9%. Check the Wall Street Journal for copper, tin, silver, oil and gold pricing and you will see a significant upward trend. People in our industry have done a yeoman's duty in improving throughput, reducing waste and doing more with less, but at this point I do not think that many can absorb this level of cost increases without feeling it dramatically on their extremely thin bottom lines.
My second view of reality is that while there is probably an overcapacity of production facilities in the industry, there surely seems to be a dramatic undercapacity of good, reliable, relationship-oriented suppliers in the industry. Put those two reality check items together and possibly there is an opportunity for many in our industry.
With costs on the rise, we must start communicating to our customers that the downward pricing spiral has ended and some level of upward price adjustments are warranted and inevitable. No, slamming a 9% across-the-board increase is not the answer, but some relief is in order. We all need to be communicating the same message if any of us want to be successful maintaining operating margins. Unless some unforeseen event takes place during 2006, I would expect that raw material costs will continue to increase at levels consistent with those experienced during the past three to six months. That's not a business model. That's reality!
Which brings us to the lack of respect that many customers seem to have for our industry. Too many in our industry believe the business model that defines PCBs is a commodity. I don't buy that. Any product that is manufactured to customer print/specification is by definition not a commodity. Besides, what separates one company from another is how it values and develops business relationships. People value relationships. People develop relationships. People are what separate a commodity from a value-add product. Again, that's not a business model. That's reality!
Many customers understand the reality of business. They know that pricing needs to go up when costs increase, just as pricing can drop at times of lower costs – the past five years come to mind. Many customers, especially those who really value their market reputation, equally value relationships (people) and have a good respect for their suppliers.
However, too many customers view business as just a model. Too many customers are willing to sacrifice a long-term supplier for a short-term transaction. And too many suppliers will silently pay weekly price increases for gas to fill their car to get to work just to verbally abuse any supplier who tries to recoup even the slightest portion of their cost increases.
While there are many who can design or manufacture PCBs, there are too few who do so with consistently good relationship-oriented service and support. The only way that the downward pricing spiral can be reversed is if everyone respects themselves and begins to explain to their customers that costs are on the rise – for everyone! It's time that we stop referring to a business "model" and we start, instead, referring to ourselves, our coworkers, our customers and especially our industry as talented people who are in business to provide a valuable product and service.
Think about that when your staff is quoting and requoting some of those customers who remain elusive, stingy and disloyal, always looking for someone to lower the pricing bar. It's time for that business model to end! PCD&M
PETER BIGELOW is president and CEO of IMI (www.imipcb.com). He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..
