Several of you have asked for more specific information on how to achieve better pricing, beyond what we were able to cover in last month's LiveChat. In a two-part response, I want to discuss my top five actions that can improve your price competitiveness in the current environment.
1. Use target pricing: This is not a new technique, but its utility has been enhanced with FreeBenchmarking.com. The specifics of using target pricing for cost reduction are detailed in the whitepaper, “Successful Negotiating Using FreeBenchmarking.com,” posted on EBN, so I won't describe the details here, but imagine a continuous process where each quarter you address the bottom 25 percent of those customers that are most out-of-line on pricing, by identifying and implementing target prices that are significantly more competitive.
Quarter after quarter, your overall competitiveness improves as you focus on and improve your worst-priced devices. What's interesting with this approach is that there are no surprises for your suppliers. They have always known which components have had the highest margins. You haven't had that level of knowledge, or you would have acted already. This is truly low-hanging fruit. Your supplier won't resist these price changes too strenuously because it knows they are out-of-line for you.
2. Get consistent pricing across locations: Many companies pay different prices for the same component in the same region, because they are having products built in different factories or by different contract manufacturers. We recently identified nearly a million dollars in savings for a client due to inconsistent pricing across manufacturing sites. Unfortunately, this client is not alone, as many companies suffer from this problem to some degree. A simple spreadsheet analysis can find these opportunities within hours and enable you to act.
Once you know where these discrepancies are, it is a matter of getting suppliers to honor the best price in all of your locations within a region. Remember the supplier has already given you this price. Make sure you involve the manufacturer directly in this rationalization, and don’t work only with representatives or distributors. You may have a local intermediary trying to protect commissions and resist the change. The manufacturer can intervene to prevent this, particularly if there is a possibility of the business going elsewhere if you don’t get these savings. Having a second source helps.
3. Eliminate duplication: Many companies live with coding duplications, often paying many different prices for the same manufacturer’s item. While it may not be practical to make the engineering changes to eliminate code duplication, you can and need to get the best pricing honored on all codes. FreeBenchmarking.com Gold reports can help because they identify coding duplications in your materials list, along with the associated savings potential. You may actually be able to negotiate even better pricing through volume aggregation made possible because you know where the duplication is.
Part 2 of this post will address markup management and issues related to the Japan earthquake.