What is FMKT? Lets take a moment to examine what FMKT brings to the table in this economy.
Manufacturing companies make things. They make them out of raw materials such as copper,steel, and plastic. They often also incorporate products that others have made into their products. The added items may be “standard” items like fasteners, but more often they are “custom” products, built especially for that manufacturer.
In order to purchase such custom products, it is necessary that extensive work be done by the engineering and other departments of the manufacturer. They must define exactly what it is they want to purchase, the quality, metallurgy, packaging, delivery requirements, dimensions, and various other specific needs. This is not catalogue buying. It is detailed, specific buying of several different items. The purchasing department, together with engineering, and other departments(such as product design/marketing)will spend an enormous amount of time working to fulfill this need.
Each purchased component establishes a relationship with an outside vendor, or, perhaps, two or more vendors. There are some manufacturing companies that, as a matter of policy, will not single source critical components, however, this is the exception, not the rule.
In working with this large group of outside vendors, a part of the relationship is the establishment of price. Once a base price is established it is quite common for that basic price structure to remain in place for a long, long time. Negotiations continue from time to time, but usually the established price is used as the reference point and negotiations start there (“price linking”). An annual price negotiation of say, up 1% or down 2% or “no change” is quite common. The old established price is the “foundation” for current negotiations.
Now, in this environment, it is easy to understand how prices can get out of whack over time. There is no question that current manufacturing techniques have greatly reduced a number of manufacturing costs. Those vendors that have modernized their facilities and adopted these new techniques have been able to bring costs down -- sometimes quite dramatically. Good business technique would suggest that from time to time every business should totally “re-quote” all its purchasing. However, with the everyday crush of business, this takes time, and often this time is just not available.
Enter another factor. One of the benefits of enterprise software is that one often gains a new visibility of purchasing needs throughout the entire organization. A multi-plant manufacturing company can gain additional insight into their common buying needs on a much broader basis. In those cases where orders for like items can be combined, there is an additional incentive to re-quote the work and take price advantage of the new, higher volumes.
Now, along comes FMKT. A dedicated group of energetic consultants that offers to help it’s clients re-quote this work. Is that a welcome sight? You bet it is.
The timing is perfect. The techniques of manufacturing have changed significantly, costs have come down, and it is a great time to abandon the “price linking” and establish new, fresh quotes that reflect the lower cost advantages that modern manufacturing techniques have brought. And by engaging FMKT, one can solve the “time” problem that prevented us from re-quoting this work right along.
And while we’re going through all the work of writing the RFQ, why not give the negative auction approach a try? It’s classic competition. If we want the highest price, the auction has been used for centuries. If we want the lowest price, wouldn’t a negative auction be a good approach? I think so. It is a technique that has been used by some manufactures for a long time, however, it was never a widespread practice.
FMKT incorporates the negative auction using the Internet. After the potential suppliers have been identified, and all the work done to prepare the RFQ, the RFQ distributed, and questions answered, FMKT will invite the potential suppliers to meet at a specific time on the Internet. This is similar to visiting a private “chat room”, but more sophisticated. The potential suppliers are given a “code name” and have an opportunity to bid on the client’s RFQ using the negative auction technique.
It is a simple technique, and should, all things considered, give us (the client) a great set of new numbers that we can use in negotiating a new purchase contract. Perhaps with the old vendor,perhaps not. The auction provides a negotiating tool, and can be quite effective. The auction or “event” is for the collection of information only. Contract negotiations then continue after the “event” is finished. There is no “purchasing” over the Internet, just the collection of information (bids). If the client wishes, FMKT will also assist in negotiating the new contract.
So there we are. The FMKT acceptance in the market has been quite phenomenal and, when you understand the environment, quite understandable. They say now that they (FMKT) expect to continue to grow, at least through 2002, and reach break-even that year. Wonderful. They perform a useful, needed service and deserve to make a profit. Without making a profit they won’t survive, and I do hope they survive.
So that is where FMKT fits in the economy. They are a consulting company that will assist clients obtain new, fresh quotes on their purchasing needs. No techno babble, no magic, no flimflam. They serve a purpose, and they do a good job. All the business about eCommerce, eMarkets, etc. is just financial hype directed at investors. They incorporate the Internet for a part of their business, however, it isn’t critical, and we should all recognize that most companies incorporate the Internet in part of their business operations today.
If you like FMKT as a consulting company (as I do) great. But, when evaluating FMKT as an investment, one should keep in mind what they are. The FMKT CFO just gave “guidance” that one the FMKT financial objectives a gross margin target in the range of 55% to 60% An objective gained through efficiency, not scaling. This is the same margin objective that a well run consulting company will target. If FMKT can hold their fixed costs reasonably in line, then they will gain some leverage and may indeed make a profit. I hope they do. However, I do feel that there is an upside limit to that profitability, due to a number of factors. But we can discuss that another day.
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