The myth of “pass-along” savings

When’s the last time one of your suppliers cut their prices because they were achieving cost savings?  I’m not saying it never happens, but I doubt it happens frequently.

I began thinking about this the other day when I was watching a news program. A consumer e-mailed the following question to a financial analyst: Why—if the Federal Reserve has cut interest rates—hasn’t my credit card company lowered my interest rates?

Darn good question. In this case, the expert could only guess that the consumer’s personal credit rating wasn’t all that good and suggested the consumer check her rating with several credit-reporting agencies.

I’ve seen the same scenario play itself out over the years with manufacturing companies. In the electronics industry, original equipment manufacturers (OEMs) outsource their manufacturing to electronics manufacturing services (EMS) companies to save costs. In many cases, the EMS is given a cost-reduction target.  The EMS can achieve this target by getting volume-purchasing discounts, increasing efficiencies or in some cases, manufacturing overseas. These are the kind of things the OEM would do if it was still manufacturing its own product.

Over the years, I’ve also watched a couple of organizations—Technology Forecasters Inc. (TFI) is one of them—poll OEMs about their satisfaction with their EMS partners. Every time, TFI found that the expectations of OEMs—i.e., cost savings—were not in sync with reality. In other words, their cost-savings goals were rarely met.

There are a number of reasons for this, which are thoroughly examined in an article, “Getting Beyond Price,” by Charlie Barnhart, a former consultant with TFI. (Charlie has since formed his own company, Charlie Barnhart & Associates LLC.) One of the things I’ve always liked about this particular group of consultants is their willingness to swim against the tide. For example, TFI did an analysis of how much cost was being saved by manufacturers that moved to low-cost labor regions. Turns out, it wasn’t much--but manufacturers continue to move overseas.

It’s a tough thing to go to your business partners and ask them about passing along savings. It’s also possible that your customers will ask the same of you. But there are ways to go about it. You’ll never know unless you ask.