The tide has turned.

Everything in life runs in cycles, even foolishness. That sentiment was immortalized ages ago when it was said that "Those who fail to learn from history are doomed to repeat it." I paraphrased that same sentiment in last April's CEO Journal ("The Answer is Occam's Razor," p. 56) when I concluded that customers' recent fixation on price was a reprise of the self-destructive mistakes they (and the foundries that capitulated to the price pressure) made more than 15 years ago.

But there's good news here, in the form of two recent events that point to a reversal of the foolishness began nearly 3 years ago by those naive young MBAs and the price-driven corporate commodity teams. Do these stories signal a return to a seller's market and regular price increases? Of course not. They do, however, suggest a return to the primacy of performance in the customer/supplier relationship, much like the quality-driven "partnerships" of the 1980s.

Price Isn't Everything

The main players in story number one are an OEM casting user and one of the world's largest and most prestigious management consulting firms, which was retained to retool the OEM's purchasing function. in typical fashion, the consulting firm dispatched a team of young and very green MBAs to the OEM's headquarters.

After countless employee interviews and careful application of the consulting firm's "proprietary process" (translation: they processed yet another client through their cookie-cutter approach), purchasing was renamed "procurement," the plants were all but cut out of the supplier-selection process, and a directive went out from on high that all foundries have equal quality and service, so price is really all that matters. You know the drill.

While the story to this point is, alas, all too typical, it took a unique turn in late November, when TDC was hired to help undo the damage. A new group of managers recognized that the reorganization and the assumptions it was based on were out-of-touch with reality. Now, the OEM is rethinking those assumptions, recovering some of the relationships it threw away in the name of price, developing new relationships with other highly capable foundries and focusing on the substantive contributions suppliers can make to truly impact a customers' costs and competitiveness.

Cheaper May Not Mean Better

Story number two involves yet another major OEM casting user, this time one of the earliest and fiercest proponents of the corporate commodity team concept.

Two years ago, an iron foundry supplied nearly $1.5 million worth of castings to a division of the major OEM. Despite the foundry's unblemished record of superior quality and outstanding delivery service, that business was lost to a source that promised a 50% reduction in price.

The procurement team counted the switch a great victory but, as it turned out, the plants were counting too. Quality and engineering types at each plant were counting the new and true costs of scrap, lost machine time, lost staff time, production line downtime due to insufficient casting supply, extra administrative hassle time and so on. When it was all said and done, that 50% price reduction actually turned out to be a substantial cost increase.

As a result, the iron foundry is in the process of gaining back all the work it lost and more. And the foundry that offered the 50% price reduction? It was recently acquired (along with two better performing sister plants) and is fast on its way to being shut down. The OEM? With the foundry's help, its procurement teams are now focusing on working for the lowest total cost, and the incentives that fueled its strategy of seeking the lowest purchase price are being phased out.

Remain Steadfast

It's very difficult to discern the difference between a fad and a trend, but as a very wise foundry president said to me, "Every job must stand profitably on its own, and despite what's going on in the market-place at any given time, you've got to know when to let a customer go."

So, to all of those CEOs out there who have been holding their ground over the past couple of years in spite of price pressure, I say good for you and keep it up. Your companies will reap the rewards of this steadfastness in the years ahead. Unfortunately, it's likely to take another two years or so for organizations like these OEMs to unlearn all of the bad habits they developed over the previous two, so be patient!

To all of those CEOs who allowed their foundries to give in to the price pressure and are saddled with a bunch of poor performing jobs and accounts, I say good luck. The next 18 months will be a dangerous time to raise prices, as there are excellent foundries that don't need to do so and OEMs who aren't ready yet to give up their price-driven ways. Moreover, be advised that all indications point to yet another capacity shakeout in the coming months and that vulnerable, minimally profitable companies like yours represent that threat's most likely victims.