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Calling the Shots in Component Pricing

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?

7 comments on “Calling the Shots in Component Pricing

  1. Barbara Jorgensen
    February 24, 2011

    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?

  2. jbond
    February 24, 2011

    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?

  3. RickP.
    February 24, 2011

    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,

  4. itguyphil
    February 24, 2011

    I'd go with the latter…

  5. hwong
    February 24, 2011

    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.

  6. Mydesign
    February 25, 2011

       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.

  7. Ken Bradley
    February 25, 2011

    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.

    Thank for the feedback.

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