How do oher shops figure inflation?

I'm a total failure at it, first off. If I think the customer will be buying more later I make extras, often twice as many, but only if they have purchased the item before at least once. I figure it makes the bottom line look better if and when they do.

But the problem is that they sometimes do many years later, and it's a scramble trying to figure out when, and confronting the customers expectation that the price will be the same.
So I wonder if some shops use some automatic inflation adjustment software, and how hard it is to get through to the customer that time and money have changed?

You have two things going on there. One is making unpaid-for parts and holding inventory. The other is inflation tracking.

The "lean" crowd, and possibly your tax accountant, would tell you that holding inventory is bad. But it's nice to be able to ship right away if that order does come in. Your call, and not really what you asked about.

My opinion is that you should quote your customer a price based on what it would cost you to make the parts today. Price it out, just as if you didn't have parts on the shelf. Materials might be up (or rarely down). Time might be down due to better machines, or up due to shop business. NRE might be absent, because you already built the tooling. Add your margin and minimums and issue the quote. Put a reasonable expiration on the quote: 60 to 90 days.

If your customer wants to lock in prices, they need to issue a long-term purchase order, and you need to negotiate appropriate terms, including sufficient payment up-front so that you and your customer both benefit from ordering material in large quantities. Otherwise, each quote is based on what it would take to make the parts today, and that's all the explanation they need.

Having gone through the work of quoting the first time, you should save your notes (spreadsheet) so that all you have to do is update a few material prices and maybe your time/machine costs to crank out a new quote for repeat jobs.

Boy, sfriedberg just about said it. The only thing that I would add is that the customer does know that prices change, usually in the upwards direction. When they remind you of the price a year or two ago they are just hoping to get a bargain.

Believe me, I worked for a boss/owner who always pulled every trick he could think of to keep prices down. In his case it really worked against him as when the vendors learned his habits they added a hefty amount to the original quote so they could discount it. I could have gotten better prices without the games, but he would not let me. He had to show me how good he was at the process. When you counted in his and my time in the process, many of the purchases were as much as double what they should have been. But I digress. Your customers KNOW about inflation. Don't be afraid to tell them that your prices have changed.

As for making extra parts and holding them in stock, that could have tax consequences. Are you sure it is a good idea.

to me it makes no sense to waste time and resources making parts you have no open orders for just to have that cash sitting on the shelf. i dont care if they ordered 500 a year for 5 years..on year 6 i wouldnt make a part until po is recieved

secondly if the customer revs the drawing thenu have a bunch of junk and wasted money(unless you have an open po but even still if u are stocking to quantities beyond their forecast they may only pay you for a certain portion of the old rev.

all the time and money going into parts sitting on a shelve could easily been used to make parts you actually get paid for this year

Thanks for the responses.

I was hoping there was an accounting program for machine shops that is commonly used, but I know that small niche software is very expensive, and since no one mentioned it it probably doesn't exist as a program specifically for small shops. We use Quickbooks Pro now and that's not my area, it may even have the capability to enter increased costs in as a yearly ratio. Like a COLA.

As to storing parts, since there are no guarantees or commitments to buy them I consider them scrap until the customer buys them, and generally it's only customers I have known for many years. It is true though that revisions have caught me with genuine scrap several times, though we seldom build up our stocks too far ahead. One large customer went out of business because assemblies he made could be gotten in the orient much cheaper, and suddenly I had a huge lot of nice looking works of art with no buyer.

Not rocket science, just add at least 1 to 2% per year to keep up. Hold the price for 5 years and then bump it up 10%.

You only get caught with extra parts that never get bought, or that get changed and are no longer any good so many times before you stop playing that game and only make what's required.

As to inflation, parts seem to go down in price over time more often than they go up in this machining biz. Different maybe if you make your own product. I do some things now for less than I was doing them for 5-10yrs ago. Only have 1 customer who asks each year what the coming year's prices are gonna be to adjust the pricing for his product.

partsproduction said:

Thanks for the responses.

I was hoping there was an accounting program for machine shops that is commonly used, but I know that small niche software is very expensive, and since no one mentioned it it probably doesn't exist as a program specifically for small shops. We use Quickbooks Pro now and that's not my area, it may even have the capability to enter increased costs in as a yearly ratio. Like a COLA.

As to storing parts, since there are no guarantees or commitments to buy them I consider them scrap until the customer buys them, and generally it's only customers I have known for many years. It is true though that revisions have caught me with genuine scrap several times, though we seldom build up our stocks too far ahead. One large customer went out of business because assemblies he made could be gotten in the orient much cheaper, and suddenly I had a huge lot of nice looking works of art with no buyer.

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Its amazing, you must have a very profitable shop
where money is no object,or a lazy and dis-organized work force
where they run more only because set-up is already running
and "its too much work for change-over",I have seen the picture
before my competitor went out of business with that model, they
would run extras and owner used to say " I sell them later" were doing his own product,me too, but trend changed and market
became money tight and he end-up with all his possible profit in the scrap yard, I only ran what i had deposit of sale, at least will cover material and finishes, in case didn't pick-up
when done,a aerospace shop where my brother was employed went
out of business with his proud mini-warehouse of parts of over-production,my brother used to tell me that was nice just go and
fill the order with stocked parts and they would tell customer that to get rush order they needed overtime money so they work
over the weekend or two day order that will stop production and
got away for awhile, then 09 economy and their excesses could them save them, they used to blow the money away because was easy money and reality was a ineffective management old guard
style, customer will order 20 pieces they do 40, 20 stock to
refill next order, the losers were also the metal houses that gave them credit, because they were buying double material and when economy came crashing, customer were slow in ordering and they had 20 employees, big houses and expensive cars because money was easy and real state crashed at the same time,and had to become renters again lost their mansions.

SND said:

You only get caught with extra parts that never get bought, or that get changed and are no longer any good so many times before you stop playing that game and only make what's required.

As to inflation, parts seem to go down in price over time more often than they go up in this machining biz. Different maybe if you make your own product. I do some things now for less than I was doing them for 5-10yrs ago. Only have 1 customer who asks each year what the coming year's prices are gonna be to adjust the pricing for his product.

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I find that it is feasible to hold the price if quantities ordered are trending higher, since you get to spread some fixed costs over more units. Or maybe the initial pricing was quite profitable, at which you are comfortable freezing the price for some time and come out looking like the good guy That is really the only explanation I know of to not increase prices, and if your customer is savvy, they'll know they were paying high prices at the beginning because you're not asking for more now.

Learn to read a financial statement. That will tell you right where you are and what you can afford to do. Inventory for a job shop is not a bad thing as it is so easy to hide and not show from a tax liability standpoint. Talk to your accountant. You do a have a CPA don't you?

Like I said, learn to read and interpret your financial statement. That is your sole document on how your business is doing.

Thanks for the responses.
Bear in mind that we only make extras for customers we trust and who we have a long history with.
I should have seen the closure of the large customers shop coming, that's a different problem, optimism. I should have kept my ear to the ground, there were rumblings.