Commercial Awning Manufacturing
Awning manufacturer getting killed by fluctuating commodity prices
A large commercial awning company was having trouble with fluctuating aluminum prices. As with most construction-related items, there is a long time period between quotation and delivery. Over a short period of time, raw aluminum prices doubled. This put the manufacturer in a tough position to either eat the cost increase or wiggle out of the quotations.
They tried to put an * on the quote explaining that pricing might increase due to aluminum commodity prices. This worked to some extent, but customers were still highly dissatisfied. Aside from widely fluctuating commodity pricing, the awning manufacturer had an issue with her business model. The pricing model was based on a false presumption of stable commodity values. When raw material prices were not stable, the model failed someone. Either the company sacrificed profits or the customer was unhappy with unexpected pricing increases plus the uncertainty of their construction costs.
With the help of the Business Model Secrets tactic #32, the awning company re-evaluated their risk assignment model. The short version is that neither the customer nor the manufacturer wanted to accept the risk of commodity prices. However, risk is like a game of musical chairs. Someone ends up without a chair. The awning company owner realized that she was the one ending up without the chair and she dramatically changed the way she assigned risk.
One of the many changes implemented was purchasing a commodity futures contract on the London Metals Exchange. Customers were given the option of purchasing “Aluminum pricing insurance” for a small fee or accepting the risk of raw materials increases. This change in pricing model not only saved the company significantly; it created more satisfied customers by providing price stability and predictability.