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Pricing Global, Acting Local

While perception and expectation have a significant impact on pricing (see: The Cost (Not Price) of Being Global) there are structural reasons why global pricing remains elusive. One of them is the way business is conducted. Even in the most global organizations, profit and loss are still measured on a regional basis. In order to be meaningful, apples need to be compared with apples, and oranges need to be compared with oranges. It makes sense — except in the global supply chain.

Electronics components flow freely around the world — that’s the point of being global. However, this freedom is one of the very reasons achieving a global price is difficult. For the electronics supply chain, it’s all about where an order is booked versus where an order is fulfilled and how channel salespeople are compensated. A distributor in the US convinces a US-based designer to use Part A in an end-product. For its effort, the distributor is compensated based on Part A’s sales. The BOM on the product is quoted in the US, and Part A is priced at $1. That $1 also builds in the supplier’s profit margin.

The product’s OEM uses a Singapore-based EMS to manufacture the product. The distributor, which has a sales office and warehouse near Singapore, can fulfill the EMS order. However, Part A sells for 75 cents in the Far East. Suddenly, the distributor’s compensation goes down because the compensation was originally based on $1, not 75 cents. The supplier’s profit margin may erode to account for the difference between $1 and 75 cents. And should the sale be recorded in Singapore, or in the US?

In the days when products were manufactured and sourced locally, this wasn’t a problem. But the very nature of the global supply chain adds such complexities. There are costs associated with shipping products around the world, currency exchange differentials, and various payment terms. On the surface, a global electronics industry should level the price playing field — the ability to manufacture anywhere and everywhere should even out the various costs of doing business. Dig a little deeper, though, and the realities of regional differences become apparent. Every partner in the supply chain faces that dilemma: supplier, distributor, and customer. Each has its own business interests at stake.

These are just a few of the other factors (besides perception) that have an impact on component pricing. In upcoming blogs, we’ll discuss a few more.

8 comments on “Pricing Global, Acting Local

  1. tioluwa
    October 5, 2010

    Barbara,

    After reading throgh your two posts i wonder: can a supply chain be handled globally?

    taking into consdirations the factors you've raised, i think once we have to cross international boundries, expecially across continents, the issues need to be addressed regionally.

    The internet and communication systems has really turned the world into one single global entity but when thing leave the cyber world, and we face reality of the market and national differences, we realise that we are not yet “global”.

     

     

  2. Barbara Jorgensen
    October 5, 2010

    Hi Tioluwa,

    The supply chain is really less global than one would think. At the same time, there are a few companies that have established a global published price (which leaves room for actual negotiated price) and one company I hear is really trying to unify prices for their whole product line. I will spend some time over the next few weeks interviewing the principals involved in this effort and sharing what I learn. I know the industry as a whole favors the idea–it makes a lot of transactiosn easier. If the supply chain pulls together on this, I think it has a chance of succeeding, but that is still a long way off.

  3. bolaji ojo
    October 5, 2010

    This is why it seems the electronics supply chain can sometime seem like a delicate dance with complex steps on the edge of a cliff. That the industry always manage to pull off this intricate negotiations without shutting down sporadically is a testimony to the expertise of the players – or the knowledge/wisdom of their lawyers! Each part in the chain or network, as some prefer, is seeking profit motives while balancing the interest of its suppliers. How does a company get the best pricing it wants globally for components without at the same time appearing to be gouging its suppliers?

  4. Barbara Jorgensen
    October 5, 2010

    I think the answer to the last question depends on which link of the chain you represent. For component makers, prices are never high enough; for distributors, suppliers' prices are too high and customers want to pay too little; and for customers, prices are always too high whether they are ordering from the supplier or from the distributor.

    At the same time, the channel has become better at understanding cost vs. price. As long as suppliers, distributors and customers recognize the costs associated with manufacturing, storing and moving components around the world (and are willing to pay for those services), all will come closer to protecting their respective profit margins while moving toward a price that all can live with. 

  5. SP
    October 5, 2010

    Well this is exactly the reason why the sales guys sometimes get unhappy when engineers contact their headquarters to source component instead of contacting local guys. Its all the profit margins.

  6. Hawk
    October 6, 2010

    Barbara, It seems the global supply chain can be “global” sometime only  in name
    alone. Your article discussed component pricing but there are  other elements of
    the supply chain that have similar pricing issues,  including contract
    manufacturing
    , logistics, after-sales services, etc. A  company that wants
    limited variations in global component pricing would  also be likely to insist
    on the same for services provided by other  parts of its supply chain. For
    instance, if Apple's iPod is manufactured  by Foxconn in China and Vietnam,
    would Apple have to negotiate pricing  based on where production takes place or
    should it negotiate one flat  pricing and leave the electronic manufacturing
    services provider
    to  decide where to make the products? Labor rates may differ
    substantially  in the two locations yet Apple will likely sell the iPod at the
    same  price in, say, the United States, notwithstanding where they were 
    manufactured. Any thoughts?

  7. Barbara Jorgensen
    October 6, 2010

    Hawk–I agree 100% with your assessment. The Apple example you cited is a classic case: Apple likely has a “global” price from its component suppliers that is unique to Apple. But Apple's EMS partners–in this example Foxconn–may get a different price from those same suppliers because Foxconn sources in such huge volumes. If Foxconn's price is lower, do they “refund” the difference to Apple? Does Apple “refund” the difference to its customers? I doubt it. And you are correct–Apple sells the iPod for the same price no matter where it was manufactured.

  8. Barbara Jorgensen
    October 6, 2010

    Unhappy sales guys? Perish the thought…But you are right, SP. Although most of the personal contact happens at the field level, the contracts are negotiated at HQ. The tough part is, it makes sense: If you are an OEM, why not consolidate the purchasing?

    One of the ways distributors used to work around this was to have an account manager at the corporate level and at the field level. That kind of personnel is a luxury nobody can afford any more. It's no surprise that someone in the equation ends up unhappy.

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