Competitive Market Requires Sharper Pricing Tools

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.