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More on Pricing: Can Benchmarking Help End the Secrecy?

Ken Bradley knows firsthand the difficulties of navigating the component pricing maze.

Formerly chief procurement officer at {complink 3858|Nortel Networks Ltd.}, Bradley, in the heyday of the Canadian telecommunications equipment company, presided over billions in component purchases and was always in search of the tools that could offer his company a deeper insight into “actual pricing conditions” within the market.

It was never easy: None of the pricey tools in the market then really offered the perfect solution, and eight years after leaving Nortel in 2002, Bradley believes component pricing is still shrouded in too much secrecy. Companies that have billions in purchasing costs easily secure much better pricing terms than smaller firms, but even in the club of billionaire parts buyers most executives remain completely in the dark about what rivals pay for similar components.

Bradley wants to help change the dynamics of the component pricing system in the high-tech world and, as part of that push, recently launched Freebenchmarking.com, a site developed by Lytica Inc., where the ex-Nortel executive is now CEO. Freebenchmarking.com enables companies to “easily, quickly and confidentially compare their electronic components pricing against… database of current industry pricing, based on total component spending and spending by commodity,” Lytica says. In other words, Freebenchmarking.com wants to lift the veil and end the secrecy involved in component pricing.

That's a tall order, and it’s unlikely all parties involved in high-tech manufacturing — component suppliers, OEMs, EMS companies, component distributors, and supply chain software vendors — will speak with one voice on this. While companies may talk about the need for openness in component pricing, they are quite unlikely to aggressively advocate this, because so many of them use the secrecy involved in pricing as a competitive weapon.

The largest OEMs do not involve their closest and biggest contract manufacturers in component procurement discussions with component makers, largely to ensure pricing information is kept secret. Since the same contractor may serve more than one OEM, the knowledge of pricing agreements made between one company and its suppliers may slip out, endangering competitiveness, they reason.

In most cases, companies like {complink 2376|Hewlett-Packard Co.} negotiate pricing directly with suppliers, which then ship the parts to EMS companies without disclosing terms. The OEM may not touch or see the components, but it always knows exactly what was ordered, how much was paid for it, where it is consigned until used, who bears ownership responsibility, who is responsible for unused parts, and how it is finally disposed.

All the terms agreed to with the supplier in this situation are kept secret by the OEM, which mandates vendors must not share this with anyone. In fact, some OEMs — {complink 379|Apple Inc.}, for instance — go as far as forbidding component suppliers from even revealing they supply parts to customers. Until research firms began offering “teardown” exercises during which they gut finished high-tech equipment to reveal the innards and who supplied what, this type of information was typically unknown to ordinary investors.

Bradley and his team at Lytica believe they’ve found a way to change the industry mentality. Here’s how it works: Suppliers and OEMs upload confidential component pricing information to Freebenchmarking.com, which in turn offers subscribers the latest data on what companies have most recently paid for the parts. Buyers can then use this information to negotiate better pricing terms for their own companies.

“Every client that confidentially submits its cost data receives, within a day, a detailed electronic report that not only assesses cost competitiveness (in terms of cost advantage or disadvantage to others) but also highlights areas of risk related to single-sourced and end-of-life components,” according to Bradley.

13 comments on “More on Pricing: Can Benchmarking Help End the Secrecy?

  1. DataCrunch
    November 11, 2010

    I would be interested to hear feedback from actual users of this service.  I like the idea a lot, but I think there may be too much room for manipulation of the data.   The accuracy of the reports would be based on the need for a large number of companies to participate and also assumes that the clients are honest about their costs.  I have not used this service, but in theory couldn’t a client provide data with that showed it paid a higher cost for components that it really did at higher stated volumes as well?  Now this would make the average costs on the report higher for certain components and other clients looking for savings would see an average component cost that is really higher than the average, and potentially much higher than what was paid for by the client that entered the data.  The new client, which may be a competitor of the “dishonest” client, would then think they would be negotiating a good deal on pricing that was not accurate and higher than what its competitor paid. 

    This service seems to be based on the honor system rather than gathering actual proven costs spent by clients (which would be very difficult, if not impossible to gather automatically).  Unless there is some way to ensure that the data is accurate, I think that what is meant to have the best of intentions can be used for all the wrong ones. Again, don’t get me wrong, I do like the concept and would like to see these types of services across all industries.  Similar to the Edmunds report currently used for car shopping, but for everything: finished goods and components industry wide.  

    Bolaji, what are your thoughts on this service?  Maybe I am being too skeptical.

  2. bolaji ojo
    November 11, 2010

    Dave, There were stock quotes from Lytica's press statement about this subject that I did not use when compiling the article because it's always easy to get these from customers. So, I agree with you that testimonials from actual users would be important to gauging the effectiveness of the site. However, I did speak with Ken Bradley and Lytica sales executive Rob Griffin and posed the questions you raised. Their response was that they have developed ways to determine the authenticity of the information. Ken will further explain this in an article for EBN that will go live on Monday. Take him up on it. Ken is ready to explain himself.

  3. Ken Bradley
    November 11, 2010

    David,

    Your concern about data quality was a concern to us in developing the site and service. We have addressed this by keeping our data segregated based on its source. FREEBENCHMARKING.COM has three reference data sets with names taken from the service level provided to clients; Silver, Gold and Platinum.

    Our Gold reports provid results against all three sets of data. Our Platinum dataset is made up of data taken from only our Platinum Clients. We are active in working with the data of Platinum clients, their contract manufacturers and suppliers. We see and verify that this Platinum data is pristine. It is accurate and uncompromised. There is no opportunity to taint Platinum reference data.

    We acknowledge in the reports that data quality is not as good in Gold and possibly less so in Silver. We present results against all three because the sample sizes are larger in Silver and Gold. Also consistency in message between the dataset results is reinforcing.

    Thank you for your question.

  4. Barbara Jorgensen
    November 11, 2010

    This service would definitely level the playing for the buyer community. From that perspective, I can see why OEMs would be happy–OK, willing– to share their pricing information. I'm less clear on why suppliers would do so. They are as protective of their pricing information as OEMs. Chances are, buyers are going to use the lowest price to negotiate with their supplier. So for suppliers, this could drive prices down. I don't see the upside.

    It will be good to have the opportunity to communicate with the execs on this. Thanks for the opportunity.

  5. Rob Griffin
    November 11, 2010

    Barbara,

     

    A couple of clarifications.  Our data is used in aggregate form only and we never reveal supplier or client pricing. As a pure benchmarking service, we help clients understand how their pricing compares with best-in-class and average pricing in our database.  Suppliers can use our reports to gain insight into their market competitiveness, and understand how their pricing is trending against competitiion quarter to quarter, or whatever timeline they choose. I also know from my experience in semiconductor sales, that reliable benchmarking data can be invaluable in justifying more competitive pricing with internal marketing groups. I encourage buyers and suppliers to try the free Silver service, and contact me with your feedback and questions.

     

    Rob Griffin

    VP Sales & Marketing

    rob_griffin@lytica.com

     

     

  6. DataCrunch
    November 11, 2010

    Ken, thanks for your honest response and shedding some more light on the different levels of client services.  Bolaji mentioned that your article will be available on Monday.  I am looking forward to reading it and learning more about FREEBENCHMARKING.COM.  Like I mentioned before, I really do like the concept.  Thanks again.

  7. SP
    November 11, 2010

    Well, its definitely a very good initiative to set up benchmarking of component pricing. But as the article says not everyone wants to or can be open. After all its all business and everything ends on money. I guess everyone would be happy if this sets up in reality and becomes part of business ethics.

  8. Ms. Daisy
    November 11, 2010

    What a great job Lytica has embarked upon to eventually create a leveled playing field for manufacturers buying electronic components. Hopefully this will help bring down prices. But I find it surprising that executives of multi-billion dollar companies remain completely in the dark about what rivals pay for similar components until now. What happened to assessing the opportunities and threats to a company's survival in order to remain competitive? But on the flip side, I am not surprised about the choice to remain in the dark to encourage secrecy and create an illusion of superiority of end products and its accompanying high retail price.

  9. Barbara Jorgensen
    November 12, 2010

    Thanks Rob. That makes more sense. I can see how suppliers could benefit from the serveice.

  10. Hardcore
    November 12, 2010

    How would this 'pan out' legally?

     

    couple of questions:

    1.Is it actually legal to disclose such information publicly in an attempt to manipulate the market prices of components, especially if the Supplier has the information covered by an NDA ?

    2. How would the database be protected from people submitting false data in an attempt to force the prices down?

  11. bolaji ojo
    November 12, 2010

    The dealings, naturally, must be above board legally and I doubt a non-disclosure agreement between a supplier and the customer is weighted heavily towards the supplier. In many of these situations, the supplier is really at a disadvantage most of the times. It must comply with non-disclosure requirements from the customer but lacks typically the muscles to request the same of the customer.

    At some level, these pricing information are also publicly available though maybe not at the granular level. I don't believe buyers are completely in the dark as to what they can expect to pay for components but as you may imagine, a fraction of a dollar shaved off millions in parts can add up to huge savings.

  12. Ken Bradley
    November 13, 2010

    These are good questions and I am sure a concern to many readers. Our approach and solution to competitiveness benchmarking has been reviewed by our attorneys with no issues raised.

    To question 1, no price information or other client names is disclosed publically in our reports. The information Lytica receives is used to form statistical distributions that are used to assess competitiveness. In using FREEBENCHMARKING.COM uses sign, electronically, a contract with Lytica that restricts the use of their data and commits us to confidentiality.  This agreement can be downloaded off our website after registration. In this regard we are no different than any other third party engaged by a company to help with supply chain service. Others in this same relationship category would be EMS providers who see and work with a clients’ pricing or auditors reviewing financial statements and inventory valuation.

    To question 2, as will be discussed in my article to be published by EBN on Monday, we have two ways of ensuring the quality of the data in our analysis. The first is that we segregate the data by its source being Silver, Gold or Platinum clients. Platinum data is data from our Platinum customers. We know Platinum data is pristine because we work with this data everyday getting customer quotes, implementing price reductions at contract manufacturers and reviewing price books or other cost information. We see the customer’s source data.  We report in Gold reports against all three datasets independently. The second way we ensure quality is to have our component engineers and specialists review data before it is accepted into the database as reference data. When a report is requested, we add the clients data to the reference data sets, run the report and then remove this data from the data set and place it in quarantine until deemed acceptable or rejected by Lytica. Doing this only the client submitting contaminated data gets a contaminated report. We have proprietary tools and algorithms that we apply to Gold and Silver Client data and reject the entire dataset if anything fails our tests

    Thank you for these really good questions.

     

    Ken Bradley

    President

    Lytica Inc.

  13. Mydesign
    November 18, 2010

       Benchmarking is the process of comparing business processes and performance metrics to industry bests practices. The dimensions used for measurings such process are quality, method, time and cost. It also involves the identification of best firms in similar industry or any other industry where similar processes exists or happens. By comparing this results and processing of these studied from similar industries with our own results, which help to learn that how well the targets perform and how they do it. It’s also used to measure performance using any specific indicator resulting in a metric of performance and compare with others.

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