'I have twenty percent spare capacity.' I say, letting this sentence hang in the air.
From the lack of response I understand that Johnny doesn't see the relevance.
'I need twenty percent more sales,' I translate for him.
'Alex, orders are not apples hanging from trees. I can't just go out and pick some for you.'
'There must be orders that you decline, because the quality requirement is too high or because the client is asking for unrea- sonably short delivery times or something. Get me those orders.'
'You probably don't know how bad the economy is,' he sighs. 'Today I accept any order, anything that moves. I know that a lot of dancing will be required later, but the current pres- sure is simply too high.'
'If the competition is so fierce and the economy is so bad,'
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Lou says in his quiet voice, 'then it must be that clients are press- ing for lower prices.'
'Pressing is not the word. Squeezing is much more appropri- ate. Can you imagine, and this is just between us, in some cases I'm forced to accept business for practically zero margin.'
I start to see the light at the end of the tunnel.
'Johnny, do they sometimes demand prices that are lower than our cost?'
'Sometimes? All the time.'
'And what do you do?' I continue.
'What can I do?' he laughs. 'I try to explain the best I can. Sometimes it even works.'
I swallow hard and say, 'I'm ready to accept orders for ten percent below cost.'
Johnny doesn't hurry to answer. His peoples' bonuses are based on total sales dollars. Finally he says, 'Forget it.'
'Why?'
He doesn't answer. I persist, 'Why should I forget it?'
'Because it's stupid, because it doesn't make any business sense,' he says in a hard voice, and then softer, 'Alex, I don't know what tricks you have in mind but let me tell you, all those tricks have a very short life span before they explode in your face. Why do you want to ruin a promising career? You've done an outstanding job, why go and mess it up? Besides, if we lower prices for one client, it's just a matter of time until the others find out and demand the same. What then?'
He has a point. The last argument shows that the light at the end of the tunnel was just a train.
Help comes from an unexpected side.
'Djangler is not connected to our regular customers,' Dick says hesitantly. 'Besides, with the quantities he's asking for, we can always claim we gave him a volume discount.'
'Forget it,' Johnny is practically shouting. 'That bastard is asking us to give him the goods for basically nothing, not to men- tion that he wants us to ship to France at our expense.'
Turning to me he says, 'This French guy has chutzpah, it's unbelievable. We negotiated for three months. We established each other's credibility, we agreed on terms and conditions. It all takes time. He asked for every technical detail that you can imag- ine, and we're not talking about one or two products, it's for almost the entire range. All this time not even a peep about
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prices. At the end, just two days ago, when everything is agreed, he faxes me that our prices are not acceptable and sends his counter offer. I was expecting the usual thing, asking for price reductions of ten percent, maybe fifteen percent considering the large quantities that he is willing to buy, but no, these Europeans probably have a different perception. For example, Model Twelve, the one that you pulled such a miracle on. Our price is nine hundred and ninety-two dollars. We sell it to Burnside for eight hundred and twenty-seven dollars; they're a big client and they consume very large quantities of this particular product. The bastard had the nerve to offer seven hundred and one dollars. Did you hear that! Seven hundred and one dollars. Now you understand?'
I turn to Ralph, 'What's our material cost for Model Twelve?'
'Three hundred thirty-four dollars and seven cents,' Lou answers without any hesitation.
'Johnny, are you sure that accepting this order will not have any impact on our domestic clients?'
'Not unless we go out, and sing it from the rooftops. On this point Dick is right, no impact. But the whole idea is ridiculous. Why are we wasting our time?'
I look at Lou, he nods.
'We'll take it,' I say.
When Johnny doesn't respond, I repeat, 'We'll take it.'
'Can you explain what is going on?' he finally says, between gritted teeth.
'It's very simple,' I answer. 'I told you that I have spare capacity. If we take this order, the only out-of-pocket cost to pro- duce these products will be the cost of the materials. We'll get seven hundred and one dollars, and we'll pay three hundred and thirty-four dollars. That's three hundred seventy-eight dollars to the bottom line per unit.'
'It's three hundred sixty-six ninety-three per unit, and you forgot the freight,' Lou corrects me.
'Thank you. How much is the air freight per unit?' I ask Johnny.
'I don't remember, but it's not more than thirty bucks.'
'Can we see the details of that deal?' I ask him. 'What I'm particularly interested in is the products, the quantities per month, and the prices.'
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Johnny gives me a long look and then turns to Dick, 'Bring it.' '
Once Dick is on his way, Johnny says in a puzzled voice, 'I don't get it. You want to sell in Europe for a price that is much less than what we get here, even less than the production cost, and you still claim that you'll make a lot of money? Lou, you're a controller, does it make sense to you?'
'Yes,' Lou says.
Seeing the miserable expression on Johnny's face, I jump in before Lou has a chance to explain. Financial calculations, show- ing the fallacy of the 'product cost' concept won't help, it will just confuse Johnny even more than he's confused now. I decide to approach it from another angle.
'Johnny, where do you prefer to buy a Japanese camera, in Tokyo or in Manhattan?'
'In Manhattan, of course.'
'Why?'
'Because in Manhattan it's cheaper, everybody knows that,' Johnny says confidently, here he's on solid ground. 'I know a place on Forty-seventh Street where you can get a real bargain- half price compared to what they asked me to pay in Tokyo.'
'Why do you think it is cheaper in Manhattan?' I ask, and then answer my own question, 'Ah, we know, transportation prices must be negative.'
We all laugh.
'O.K. Alex. You've convinced me. I still don't understand but if it's good for the Japanese, it must be profitable.'
We work on the numbers for almost three hours. It's a good thing that I brought both Ralph and Lou.
We calculate the load that this large deal will place on the bottlenecks-no problem. We check the impact on each of the seven problematic work centers-two might reach the dangerous zone, but we can manage. Then we calculate the financial impact -impressive. Very impressive. At last we're ready.
'Johnny, I have one more question. What guarantees that the European manufacturers won't start a price war?'
'What do you care,' Johnny brushes the issue aside. 'With such ridiculous prices I'm going to lock in Monsieur Djangler for at least one year.'
'Not good enough,' I say.
