In a recent blog, I attempted to dispel the myth that there is a clear relationship between volume and price of electronic components. Many still find this hard to believe. They hold to the idea that price is somehow tied to manufacturing cost, which is related to volume.
This is rarely the case in the electronic components world, and it is also not typical in everyday life. Gas prices fluctuate daily, yet we know that there has been no change in the cost of its production at the wells or refinery. Market speculation drives price change, not the amount of oil in the ground or the cost of getting it out. Other examples include cosmetics, prescription drugs, restaurant meals, and entertainment. Housing is another great example.
People hold to the price/volume belief with electronic components because of the lack of visibility on what others pay. Why isn't there transparency on these prices? Who gets an advantage from this?
Big box electronics stores show the prices of their products on their shelves and Websites. Oil companies display the price of gas on large displays at their stations, and commodity materials (copper, silver, gold, etc.) have prices published daily in newspapers and on numerous Websites, but electronic component prices are hidden in a shroud of secrecy. Why?
Europeans and Americans are traders. In trading, you exchange one good for another. When the trading parties are satisfied, they accept the deal. Both sides believe the value they are receiving is equal to or better than what they are giving away. Is a goat worth five chickens? Is a capacitor worth 10 cents? None of this is based on manufacturing costs. Most traders also shop around. Can I get six chickens for my goat? Does Best Buy have a better price than Sears? We all do this, and we don't make a buying decision until we have analyzed the data that transparency provides. With transparency, we may even ask the retailer to match or better someone else's price, so we don't have to drive across town again. This is hard to do with electronic components, where we have little or no idea what someone else is paying.
When I was chief procurement officer at Nortel, I would get pricing surprises all the time. Suppliers and my staff would tell me I was getting the best pricing, only to find component pricing on some quotations coming from electronic manufacturing services (EMS) companies. Overall, I had very good people and good pricing, but I never knew for sure. When I would test the market, I would often be surprised. There was no transparency in my pricing, and when I would attempt to create it through outsourcing or benchmarking, I would always find opportunity.
What's really interesting is what I have discovered mining the freebenchmarking.com database, including the data I used for the myth-busting graph I showed in my previous blog. Here are some other lessons:
Many companies think they have great pricing but don't.
Too many companies have single sources when alternatives exist.
Many companies pay a high price for security of supply by allocating too much volume to less competitive second sources.
Many companies that think they have alternate sources really don't, because those sources are tied to the same supplier or factory.
I just gave myself a "dope slap"--competition is of course a key factor in pricing. Thanks readers and Ken! Most components do have a healthy competitive environment. Which brings me to my next thought: DRAM. As players exit the market and/or go out of business, pricing fluctuates. Does anyone see DRAM prices increasing and stablizing as we see more Elipdas?
Barbara, Many of your readers partially answered the question you posed about explaining the huge discrepancy in price. I think I will make this topic of my next blog and address it in more detail but the term competitive explains a lot. Competitive environments have better pricing. Things that make markets less competitive tend to enable higher prices. Things that diminish competitiveness like single sourcing, industry regulations (like in medical) making component substitution difficult and military approvals lead to higher price environments. I remember examples of very expensive hammers and toilet seat lids being sold to the military. Also when companies focus on cost, they also get better pricing.
When we benchmark in Freebechmarking.com, we try to set conditions so that we are doing as best as possible apples for apples comparisons and not including other value added services. We see wide discrepancies in price for essentially the same things.
I read somewhere that price tends to locate itself somewhere around cost of goods plus a margin prevailing in the industry. For a monopoly or niche player, though, the margin can be more aggressive.
I think competition is quite high in the components industry, we have a good number of major players, all manufacturing the same of similar products, so i don't think it is the major determining factor in component pricing.
I see prices set firstly by the competitive landscape. If there is no competition then it is set by the price the customer can bear. After that is is the GM requirement of the supplier. I do tend to agree that the prive-volume relationship is not a hard and fast one.
@Barbara: I concur with you. It is difficult to comprehend this new concept. But it is nice to know that they do work in real world. 90% of time volume/price works. In 10% special opportunity, you get much better deal and you can grab it if you have money power. But in geenral it sholud be volume Vs price.
I'll admit I'm having a tough time separating myself from the volume/pricing mindset. As you point out, transparency is key. Now, when auto shopping, you don't even go to the dealer until you have researched everything about the car online. That has been a huge value to customers.
Just curious: If you eliminate the volume-pricing equation, how do companies explain huge discrepancies in price? I'm sure there are services involved, but what are some of the other factors?
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.
While no one really can accurately predict the future, we can take guidance from another Drucker saying which is the best way to predict the future is to create it.
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