Up for Discussion: Bidding Exercises Spell Bad News for Adhesives and Sealants Industry
The process' sole purpose is driving down costs for the customers at the expense of the suppliers.
No matter what you call them—RFQs, RFPs, online auctions, reverse auctions or bids—they all spell bad news for the adhesives and sealants industry. These exercises will ultimately do irreparable harm to the industry as a whole.
From what I can determine, most of these requests are made by large corporations, many with multiple sites, though that is not always the case. A lot of these companies are held by large private equity groups whose sole purpose is to drive down costs in an effort to make their businesses look attractive to buyers. Some of these bidding processes are run internally through corporate buyers, while others are implemented by outside professionals who make a living out of the savings they generate for their clients through these invitations. Make no mistake, the process’ sole purpose is driving down costs for the customers at the expense of the suppliers. Let’s take a closer look at one of these deals.
First, all potential bidders are “invited” to participate through an official document, referred to as the supply agreement. Obviously, the more bidders that participate, the better the odds are that prices will be pushed to the bottom—so just about everyone you know gets one of these invitations. These documents are full of “fluff” about your capabilities, sustainability, performance measurements, quality, continuous improvement, corporate culture and values, financial stability, and, finally—as if an afterthought—price. On top of all this, they then get into important specifics, some of which include:
• Payment terms: Typically 60 days net, though some are longer.
• Freight: Suppliers pay all freight.
• Price protections: They normally want you to certify that they are getting the lowest prices in the industry. They want protection for ridiculous amounts of time. Some graciously allow the possibility to increase prices after the first year, albeit with very limited caps.
• Service and quality: No matter what you bid, you are stuck with the pricing even if you bid on the wrong product. That’s your problem, not theirs. You will be responsible for servicing each location, whether you are making money or not.
• Length of agreement: Most will give you a three-year deal, but they will offer you another optional year if you give up even more.
• Continuous improvement: Most want to know how you are going to save them even more money over the life of the agreement.
The one thing, apart from everything above, that irks me most is that the people running these bids typically have no understanding of adhesives and how or why they are used. To these people, “glue is glue.” It is nothing more than a commodity to be auctioned off to the lowest bidder, like a barrel of oil or bale of cotton. Their job is to get the lowest prices possible and, by golly, that’s exactly what these auctions allow them to do.
And what do we do? We fall all over ourselves at the promise of huge volumes coupled with terms that are so one-sided it borders on ridiculous. These exercises are nothing more than a one-way trip to the bottom, and we are too blind to see them for what they truly are. I have yet to speak to anyone from any company who says these deals are worth the paper they are written on—and yet we continue to participate. Why? At the end of the day, some companies may see the volumes as necessary to keep their plants running and/or helping to pay the electric bill. But if one really took the time to delve into these agreements, they would no longer be able to argue with the simple truth that they are ultimately doing a lot of harm to our industry. We will all pay for it in the end, as we watch margins erode to the point where more companies will be forced to exit the industry because they simply can’t make it on their earnings.
Ultimately, this industry, like any other, will reap what it has sown. Selling value seems to be a thing of the past, replaced now by a race to the bottom through these bidding exercises and overzealous salespeople, whose only concern is closing the sale. We seem to have lost the concept of selling a good product at a fair price that ultimately brings value to our businesses and our industry, so we can grow and thrive well into the future. What a pity, and so totally unnecessary.
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