Current sluggish market conditions challenge manufacturers to manage their inventories to meet sudden demand spikes for smart wireless devices.
The global, macroeconomic situation has a direct impact on our industry. With the European Union continuing to address debt concerns, coupled with the recent disputes between China and Japan, the variables that any given purchaser must juggle each day only seem to increase in number and complexity. With demand strength still in question, for both enterprises and consumers, electronics manufacturers must look to reduce costs, to preserve their already thin margins.
In response, manufacturers have increasingly turned to cost-saving opportunities from purchase price variance (PPV) programs. These address two critical needs: just-in-time (JIT) inventory and cost savings. Since PPV purchases follow demand schedules, inventory holding costs are reduced. The PPV model is based on purchasing components at a target threshold price that is a percentage variance below standard or expected cost and further reduces costs on a line-by-line basis.
Typically, larger, global OEMs and contract manufacturers (CMs) have dedicated PPV teams and operational processes focused on pricing strategies and cost reductions. For the midsized OEMs and CMs, there is an increased need to adopt PPV strategies. The solution has been to partner with established distributors with PPV services, so that small and midsized manufacturers can outsource what the larger OEMs and CMs have in-house.
PPV programs, at their core, are quite simple. The process generally involves providing a component demand list in the form of either a bill of materials (BOM) or a materials requirement planning (MRP) report. This report contains those components needed for upcoming builds. The PPV commodity expert then cross-references the part numbers and generates a cost savings report for any components that meet the threshold percent savings, per the agreed levels. Upon approval from the manufacturer, the required components are then purchased and scheduled for delivery at the lower cost that triggered the PPV purchase.
The commodity experts responsible for PPV need to have visibility into the entire component usage, rather than a single commodity or narrow line of components, because PPV purchases also tend to have an element of JIT logistics requirements. Therefore, it is important that the PPV service provider have more than a wide and deep market reach. Critically, that provider must have industry-recognized, anti-counterfeiting, testing, and related quality certifications to ensure that the purchased components are not only legitimate but also meet quality standards and requirements.
PPV programs have been increasingly adopted by manufacturers in response to cost and margin pressures, particularly with the lingering volatility of the global economy and marketplace. The dynamism of today's market has required supply chain partners to have greater agility -- encouraging new partnerships among top tier, global distributors and suppliers to reduce risks and costs, while ensuring quality along the semiconductor and electronics supply chain.
@Roques: In a traditional purchasing arrangement where a price and delivery have been negotiated for delivery at some point - whether that is months ahead of JIT - further cost reduction with the same vendor or group of vendors is probably not going to net significant cost savings. The key point I would focus on to answer your question is that I am specifically talking about PPV programs with Global Independent Distributors. Their systems take advantage of supply and demand imbalances that exist on a global level and create opportunities for cost reducing purchases for a subset of the overall spend for a particular project or build. Obviously, the more time available to negotiate, the more the prices have an opportunity to fluctuate. But, with an agile supplier with a strong global logistics network, cost differentials exist, even on a JIT basis. I would also add that cost-savings with a PPV partner coupled with forward delivery scheduling would provide the customer with an increased number of cost savings opportunities.
@Barbara: You are certainly correct in that the Independent Distributor (ID) works outside manufacturer or franchise agreements and that is what provides the flexibility to make PPV programs work. Ultimately, there is nothing to prevent companies from undercutting competitors pricing other than reaching a bottom price at that point in time in the marketplace for that specific component.
In any PPV program involving a large BOM, cost-savings opportunities will generally be focused on the larger spend items. Some of these components may very well be at a point where further price cutting may not be possible, but, quite often, because of global imbalances in supply and demand, there are some. Revisiting cost-savings opportunities with a specific build on a regular interval is the key to capitalizing on cost-savings opportunities.
I was about the ask the same thing. PPV, IMO, seems to need time periods that would allow the prices to fluctuate. When you have a JIT production line, you need components... well, just in time. So how can both coexist?
I should have provided more context before banging out the question. My apologies. Here goes:
In most relationships, whether they are supplier-direct or through the channel, there is a limited amout of breathing room regarding price. Suppliers set their pricing strategy and if their channel partners want to raise or reduce prices, they have to get the suppier's OK first. These are usually spelled out in franchise agreements between the supplier and its channel partners. There are also situations that aren't limited by agreements, such as distributors buying inventory from suppliers, EMS companies, OEMs or other distributors in the open market. It seems to me that there is more flexibilty here in regard to pricing because you don't need to contract with the supplier. So the question should be: What is preventing companies -- of any type -- from undercutting its competitors' pricing? Or do PPV models have a point where you can't move pricing any further?
@FLYINGSCOT: You are correct in stating that PPV and JIT have opposing constraints. While it would be false to assume that every component can be purchased at the lowest possible price using a JIT model, it is most certainly possible to purchase some of a given demand on a JIT basis and get better pricing at the same time. Global product demand and supply are in a constant state of flux and, therefore, cost-savings opportunities are constantly changing as well.
@Barbara: I'm not sure that I completely understand the question, but I will try to answer it at face value. To a great degree, PPV programs are designed to do exactly what you state - that is, to buy from the lowest cost vendor at or near the point of consumption. This certainly isn't possible for every component in a given build, but it is possible for a portion of total demand.
There are additional factors to consider, however, in using a PPV program. Supplier product and service quality are key to the successful implementation of PPV programs. Importantly, Service Level Agreements that specify quality and lgoistics standards are put in place with PPV partners.
This is a great and very informative post. Here's my cynical editor's question, though: What is to prevent the OEM from simply sourcing from the supplier/distributor with lowest price?
PPV and JIT seem to have opposing constraints. I am not sure how PPV can be effective when JIT demands materials must be purchased at a specific time ie. Just In Time (at best price possible and not at a target price which might be lower than the best price available at that time).
"How this may differ slightly from the traditional purchasing method is that it brings another party to negotiating table with a set bar to beat if that vendor wants to sell components."
This is different from the method of hiring a private investigator to follow the negotiator from the other company around, and use what photographic evidence you have been able to obtain to convince the negotiator to grant you concessions.
As semiconductor penetration increases, it is worthwhile to stop and recognize that not all industrial clients may have the same familiarity with electronics industry best-practices.
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.
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