With pricing for metals and ceramic materials on the rise and the inventory of semiconductor components growing, are we at the mercy of these trends when setting the prices we pay for electronic components? My answer to this is "Yes" as a community and "No" as individual companies.
Companies are not helpless in influencing prices; the situation is very different from what we experience at the gas pumps when filling our SUVs or hybrids. Prices on some components may be going up, but there is such a wide price variation among suppliers that a prepared company should be able to achieve cost reduction or at least minimize any increase.
In the 1970s, psychologist and tennis champion W. Timothy Gallwey wrote a book titled The Inner Game of Tennis, based on his training techniques. He would play a game with his tennis students called "bounce, hit." He would toss a tennis ball towards the student and have the student say "bounce" when he thought the ball would hit the ground and "strike" when he thought his tennis racquet would hit the ball -- not when it actually bounced or hit the racquet. With his method, it wasn’t long before the body was following the mind.
This is the first example of sports psychology using vision that I am aware of. Now elite athletes routinely visualize their end objectives. Visualizing end objectives can also be a powerful force in transforming business. Getting a mental image of a compelling, desired future state and believing that it can be achieved drives organizational progress. Industrial psychologists often use the "I have a dream speech" of Martin Luther King Jr. to illustrate the power of vision. Dr King's vision transformed society for the better.
So what vision or objective is in the heads of commodity managers when they negotiate pricing? I believe it should be aggressive target pricing that they have faith can be achieved. Amazingly, I have seen aggressive target pricing, when shared with suppliers, leading to prices being cut in half. While this level is not the norm, target pricing drives cost reduction.
How does one create this target pricing? Some companies pick a percentage cost reduction that they need. While better than nothing, it can leave a lot on the table. Other companies try to engineer a cost model of the supplier's product, apply some level of markup, and get a price. This works but requires extensive knowledge of the supplier’s manufacturing process that is not available to all companies. It is also time consuming and expensive.
A new approach we developed at FreeBenchmarking.com lets you determine target pricing for your most out-of-line components. The target price is calculated from the assessment of spending competitiveness by commodity using our proprietary tools and database. Targets are calculated as if the component price is reduced to the same competitive level as the overall commodity. This gives you a target price that is in line with what your company has proven to be capable of achieving on other similar components.
This is target-pricing a commodity manager can believe in. I look forward to discussing this and other issues related to pricing during the EBN LiveChat scheduled for March 10.
So now the question is: During price negotiations, are commodity managers standing at the gas pump, or armed with a compelling vision of target pricing?
Thank you for great response to my blog; a great spectrum of opinion and questions
My writing is based on personal experience where I have seen significant savings achieved. My comments are based on achieving these savings by staying with the same supplier and maintaining the same levels of service and quality. There are many techniques that can enable savings that work to the mutual benefit of the supplier and customer. You don’t need to be a giant to better your price competitiveness.
I am not talking about an insurance model of less for less. I believe in total cost of ownership concepts and do not advocate compromising important elements like quality in a price negotiations. Through FREEBENCHMARKING.COM, I see huge price variations across companies buying the same thing. I see both big and small companies paying too much.
It’s very true; the component pricings are going high. During the recession period, they had followed a fair pricing policy based on cost to cost, with marginal profit. Now the same components are selling with a higher price. I think now they had not following any fair pricing policy or instead of cost to cost pricing policy, they are using the demand policy. So when demand is high they are raising the price for making advantage for the better dealings. It’s like “sailing along the wind direction”. That is, since demand is more, they know anyhow the manufactures have to buy such components, so they are fixing a higher price. If demand is less then they lower the price for more sales. It’s all different business strategies.
There are alot of software vendors out there to help with component pricing. To name a a few, Demandtec and Servigistics have advanced pricing optimization techniques and market adaptive business logic to parts business.
Unless you happen to be an Apple, HP or Nokia, understanding one's positioning with Key Suppliers is the first step in optimizing the total acquisition cost.
Simply having a target price to base negotiations on without understanding you're position in a supplier's pricing strategy will not producr sustainable results.
§Achieving low acquisition costs long-term requires good planning, proven tools, an understanding of current market conditions and pricing, and highly-developed negotiation skills,
From my understanding, many companies are capable of calling the shots. Though it seems to be the over whelming number of these companies are the large ones with plenty of purchasing power. I don't know how well this would work for the smaller companies. Are these companies going to be the ones standing at the pumps paying full price? Or paying less for something that isn't exactly what they were hoping for?
Most of my familiarity with this kind of concept is "you can get this much for this price"--in other words, if you tell your insurance company what you're willing to pay, they'll have you cherry pick the various services and coverages to meet that price. My guess is you invariably have to give up something to get something. Is this a similar model, or does it work differently in the component world?
In the supply chain hierarchy of needs, certification assurance indicates the supplier’s product will meet regulatory standards, perform as expected, and be available when you need it.
We seem to have lost the ability to control our destiny. You work hard but fall farther behind. You can’t count on much to be "as expected" in the future.
EBN Dialogue enables and encourages you to participate in live chats with notable leaders and luminaries. Not only editors and journalists, but the entire EBN community is able to comment and ask questions. Listed below are upcoming and archived chats.
Archived Dialogues
Thailand Stages a Comeback Join EBN contributor Jennifer Baljko on Thursday August 23, 2012, at 11:00 a.m. EST for a live chat on how electronic manufacturers in Thailand have shored up their supply chain to reduce the impact of future natural disasters.
Euro-Crisis: What It Means for High-Tech Firms Join EBN Editor in Chief Bolaji Ojo and Contributing Editor Jennifer Baljko on Thursday, July 12, at 10:00 a.m. EDT for a Live Chat on high-tech and Europe's economic difficulties.
Microsoft Surface: Potential Winners & Losers What are the implications for the electronics industry supply chain of Microsoft Corp.'s decision to launch its own tablet PC? Join industry veteran and EE Times' systems and OEM expert Rick Merritt on Tuesday, July 3, at 12:00 pm EDT for a Live Chat on this subject.
Join EBN contributor Jennifer Baljko on Thursday August 23, 2012, at 11:00 a.m. EST for a live chat on how electronic manufacturers in Thailand have shored up their supply chain to reduce the impact of future natural disasters.
Peter Drucker famously said "Trying to predict the future is like trying to drive down a country road at night with no lights while looking out the back window." Yet in the razor's-edge world of electronics—with a lean supply chain and just-in-time demands—the need to know the future is vital.
You've heard the saying "the No. 1 supply chain risk is your people." That hasn't always been the case. But today's complex global supply chain requires a new type of multitalented employee. It's one who understands, finance, marketing, economics, is savvy with technology, graceful with relationships and can think analytically.
Where are these people? Are universities properly preparing the next generation supply chain professionals? How do train your existing workforce for these new, demanding positions?
Brian Fuller, editor-in-chief of EBN, will lead a 60-minute Avnet Velocity panel discussion that will ask and answer these and other questions swirling around today's supply-chain talent challenges.
To save this item to your list of favorite EBN content so you can find it later in your Profile page, click the "Save It" button next to the item.
If you found this interesting or useful, please use the links to the services below to share it with other readers. You will need a free account with each service to share an item via that service.
Tweet This