Ken Bradley knows firsthand the difficulties of navigating the component pricing maze.
Formerly chief procurement officer at Nortel Networks Ltd. , Bradley, in the heyday of the Canadian telecommunications equipment company, presided over billions in component purchases and was always in search of the tools that could offer his company a deeper insight into "actual pricing conditions" within the market.
It was never easy: None of the pricey tools in the market then really offered the perfect solution, and eight years after leaving Nortel in 2002, Bradley believes component pricing is still shrouded in too much secrecy. Companies that have billions in purchasing costs easily secure much better pricing terms than smaller firms, but even in the club of billionaire parts buyers most executives remain completely in the dark about what rivals pay for similar components.
Bradley wants to help change the dynamics of the component pricing system in the high-tech world and, as part of that push, recently launched Freebenchmarking.com, a site developed by Lytica Inc., where the ex-Nortel executive is now CEO. Freebenchmarking.com enables companies to "easily, quickly and confidentially compare their electronic components pricing against... database of current industry pricing, based on total component spending and spending by commodity," Lytica says. In other words, Freebenchmarking.com wants to lift the veil and end the secrecy involved in component pricing.
That's a tall order, and it’s unlikely all parties involved in high-tech manufacturing -- component suppliers, OEMs, EMS companies, component distributors, and supply chain software vendors -- will speak with one voice on this. While companies may talk about the need for openness in component pricing, they are quite unlikely to aggressively advocate this, because so many of them use the secrecy involved in pricing as a competitive weapon.
The largest OEMs do not involve their closest and biggest contract manufacturers in component procurement discussions with component makers, largely to ensure pricing information is kept secret. Since the same contractor may serve more than one OEM, the knowledge of pricing agreements made between one company and its suppliers may slip out, endangering competitiveness, they reason.
In most cases, companies like Hewlett-Packard Co. (NYSE: HPQ) negotiate pricing directly with suppliers, which then ship the parts to EMS companies without disclosing terms. The OEM may not touch or see the components, but it always knows exactly what was ordered, how much was paid for it, where it is consigned until used, who bears ownership responsibility, who is responsible for unused parts, and how it is finally disposed.
All the terms agreed to with the supplier in this situation are kept secret by the OEM, which mandates vendors must not share this with anyone. In fact, some OEMs -- Apple Inc. (Nasdaq: AAPL), for instance -- go as far as forbidding component suppliers from even revealing they supply parts to customers. Until research firms began offering "teardown" exercises during which they gut finished high-tech equipment to reveal the innards and who supplied what, this type of information was typically unknown to ordinary investors.
Bradley and his team at Lytica believe they’ve found a way to change the industry mentality. Here’s how it works: Suppliers and OEMs upload confidential component pricing information to Freebenchmarking.com, which in turn offers subscribers the latest data on what companies have most recently paid for the parts. Buyers can then use this information to negotiate better pricing terms for their own companies.
"Every client that confidentially submits its cost data receives, within a day, a detailed electronic report that not only assesses cost competitiveness (in terms of cost advantage or disadvantage to others) but also highlights areas of risk related to single-sourced and end-of-life components," according to Bradley.