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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.

13 comments on “Competitive Market Requires Sharper Pricing Tools

  1. elctrnx_lyf
    September 23, 2012

    Does the ppv model really help the component manufacturers to gain more profits in the hard times. This could be one more over head where they need to spend extra money.

  2. hash.era
    September 23, 2012

    True you need to be sharp on the market where you meet face to face with your tough competitors who are trying to overcome you and the business. So competitive pricing tools will help you to analyze the market and provide or suggest you the best to compete.

  3. Wale Bakare
    September 24, 2012

    I agree with you. Staying ahead of competitors in market requires smarter and cleverer tools, so also people handling them would need to understand the nitty-gritty.

  4. Ken Neusaenger
    September 24, 2012

    @Rich is correct – companies do not need to hire new personnel to use the PPV model. 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. The idea behind PPV is to expand cost-savings opportunities by leveraging the global reach of large independent distributors.

  5. FLYINGSCOT
    September 25, 2012

    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).

  6. Barbara Jorgensen
    September 25, 2012

    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?

     

  7. Ken Neusaenger
    September 25, 2012

    @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.

  8. Ken Neusaenger
    September 25, 2012

    @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.

  9. Barbara Jorgensen
    September 25, 2012

    Hi Ken,

    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?

     

     

     

  10. Mr. Roques
    September 26, 2012

    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?

  11. Ken Neusaenger
    September 28, 2012

    @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.

  12. Ken Neusaenger
    September 28, 2012

    @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.

  13. hash.era
    February 16, 2013

    Yes Wale as long as you are ahead atleast by a smaller margin will make sure that you are in the lips of most of the buyers in the market.

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