Price vs Cost vs Value

Price vs Cost vs Value

Date PublishedJanuary 28, 2017
CompanyPlains Fabrication
Article AuthorStephen Mackisoc
Article TypeJanuary 2017 Issue
CategoryArticles, Oil & Gas
Tags, , , ,
HUB SEARCHPlainsFabrication
PULSE Interactive

Price vs Cost vs Value




PRICE vs Cost
vs Value

Oilfield PULSE Magazine
January 2017

Plains Perspective

This topic has been discussed many times over the last 24 months here in Alberta. Whether under the guise of collaboration, supply chain, or industry resilience, it has been looked at from many perspectives, so why not one more? Before that, we need to add a third pillar here, and that is value, which involves both cost and price. Value is more directly connected to the total ownership cost of a piece of equipment or machinery.

The people buying and leasing machinery, equipment such as process modules and even more commodity based things like pipe racks, do not have to make much of an effort to convince suppliers to lower their prices. In many cases, it is the good old, “You’re really close, my friend. If you could just shave off two more percent, I think you will get the deal.” There is also the offer of a larger, multiple unit sale to get a “quantity price” and then using that price for much lower quantities. This happens again and again during negotiations. I was even told by one supply chain contact that they are forced to keep a tally sheet to ensure they have gone back at least five times seeking a lower price from suppliers. Again, a focus totally on price with little regard to cost or value.

Price vs Cost vs Value

The people doing the buying have successfully changed what should be a cost based pricing model to a willingness to pay model. We cost out massive jobs and then immediately start viewing the bid from a willingness to pay perspective. The sad part is profitability can then get cast aside, and that is a dangerous and slippery slope to be on. We need to estimate and cost as accurately as possible and set the bar for a minimum acceptable profit. As everyone knows, this profit number needs to take into account many different concerns, such as ongoing capital equipment requirements, maintenance activities, personnel needs, and reinvestment.

Price vs Cost vs Value

Let’s be clear. The bottom line is we DO live in a supply and demand economy, and manufacturers must understand and embrace that reality. OPEC controls the global price of a commodity by manipulating production volumes based on current demands. Everyone understands how this dynamic works. Alberta manufacturers need to think of ways to either control the supply or create demand. In my opinion, controlling the supply is the easier of the two; although, it requires a great deal of intestinal fortitude, commitment, and intelligence.

There are fewer suppliers now versus 18 months ago, so the time to dig in is now, and it must be done during negotiations.

In the current climate in oil and gas, there are simply not enough tough negotiators on the supply side within the manufacturing sector. I am not about to suggest price fixing or collusion; however, manufacturers and fabricators in Alberta absolutely must begin saying “no” when asked if they cannot give a small percentage more off the price. You are allowing yourselves to be manipulated. In some cases, it is an effort to just keep the doors open, and in others, it is a flawed compensation and motivation structure that is hurting you. There are fewer suppliers now versus 18 months ago, so the time to dig in is now, and it must be done during negotiations. Producers also need to reconsider this constant downward price pressure. The more fabricators and manufacturers who close their doors the fewer there will be, and then you will have a supply issue. As oil continues to rebound and if OPEC stays the course, the pendulum will indeed swing back the other way, and the shoe WILL be on the other foot.

We KNOW there are huge advantages to Alberta producers buying from Alberta manufacturers and fabricators. The current government does not appear to be buying into rewarding companies for “buying Alberta”, so the change must come from industry itself. During negotiations, we MUST clearly and quantifiably identify the many advantages we offer. These can include lower inspection costs, higher quality products, better service, quicker response to change, and many more advantages. Once these advantages are identified, we can then put dollars to them to justify the difference.

Currently, there are simply too many negotiations where suppliers, manufacturers, and fabricators blindly believe what they are being told. If someone is telling you they can buy a Porsche exactly or better than yours for a Volkswagen price, you need to look them in the eye, shake their hand, and walk away. Lowering your own price is NOT THE ANSWER, especially if it puts your company in jeopardy! And yet, we continue to do just that.

Price vs Cost vs Value

In my discussions, I can tell you there is a fundamental disconnect within many buying organizations. In some, it is a cultural cause, and in others, it is people being rewarded for getting lower prices with no connection to true cost and ultimate value. If you compensate and reward people based solely on price, whether buying or selling, you WILL negatively impact your own profits and the health of your business.

Then, there is the disconnect between capital and operating costs. We are seeing those two groups collaborate more within the buying companies, and the industry needs to recognize that. The producers seem to now have a much greater appreciation for this connection and its value, but they are certainly not going to tell YOU that. Why would they? If every time a supply chain person comes back to you and asks for a “better deal” you give it, then you are simply training them to continue to do just that. You may have a lower Total Cost of Ownership, but you are neglecting that fact during negotiation and not using it to your advantage.

Manufacturers and fabricators in Alberta need to understand and quantify their own value proposition. Once that is complete, we need to then stick to our guns during difficult and trying negotiations.

If we do not, many people will be driving your Porsches at Volkswagen prices, and there will soon be no more Porsches!

Price vs Cost vs Value

Stephen Mackisoc
Operations Consultantr

Price vs Cost vs Value






Originally published in the 

January 2017 Issue of Oilfield PULSE