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Registered & Screwed

If the supply chain psychiatrist were to run a word association test, the expected answer to associate with the word registered would be screwed !

While this may sound harsh, many OEMs are unknowingly caught in a registration system that has long-term consequences for materials cost. Registration is a process, used by manufacturers, which rewards a distribution or representative company for providing engineering services to OEM customers. Once registered, the lowest price that the OEM can obtain is through the registered channel, which belongs to that distributor or representative, assuring that the company providing the engineering service gets the business.

While fair in theory, this practice kills competition. Many OEMs believe that this registered price is a “best price” — which, of course, it becomes — as they will no longer be able to find better pricing. It is not, however, a marketplace best price or even necessarily a fair price for them. The problem is made worse by the fact that customers are stuck with registered pricing whenever they buy that component, whether it is for that initial product or any subsequent products that use this component.

Of the OEM companies that understand registration, I had found none that like it; contract manufacturers hate it, and even some distributors dislike the process. It attracts overhead and adds to costs, let alone killing competition and competitiveness. I am actually surprised that this practice of registration hasn't been investigated and stopped under US antitrust legislation, as it is certainly not working in favor of the consumer; in my view, it has all the earmarks of price-fixing.

In addition to eliminating competition, the problems that I have with registration stem from the fact that many companies don't know that they have been registered and that application engineering support accepted by the OEM's design organization becomes a cost penalty for the entire life of the product. It is hard to believe that companies can get locked in without knowing, but they can — and do. Further to this, at times there is a feeding frenzy with representatives and distributors trying to be granted an OEM's registration even when their contribution is minimal or non-existent. Not exactly behavior to be proud of.

It is the long-term nature of registration that really irks me. Many companies have policies that prevent the amortization of R&D costs into the cost of goods sold. These companies pay for tooling upfront or expense and pay the price of design services. They gain from this in two ways; first, they expense the R&D in the year it occurs, and, second, their product cost is the real cost of manufacture. As their gross margins correlate with stock price, shareholder value is not reduced by hidden R&D amortizations. When components are registered, the R&D cost is put into the product cost without the OEM being given a choice. To me, this is just plain wrong.

Registration is usually associated with sole source, high intellectual property components. I would like to suggest that manufacturers change or eliminate their registration processes. Here are some thoughts:

  • Ask customers if they want to use the registration process or pay for the services upfront
  • If registration is chosen, limit the term of registration to a length of time suitable to recover the non-recurring engineering charges incurred
  • Verify with the customer that the company trying to register an OEM has actually provided a service worthy of compensation or registration. (Having the distributor or representative produce OEM-signed timesheets as proof would be really cool.)

For OEMs caught in a registration dilemma and unable to achieve any level of cost reduction — work directly with the manufacturer. Gather every element of negotiation leverage that you have to drive cost improvement with this manufacturer. The most effective leverage I have seen is to restrict or prevent significant new design awards to the manufacturer until they address your cost needs.

In my view, manufacturers should be working to help their customers succeed. As economic conditions change and the OEM's need for real cost improvement increases, manufacturers should step up with cost improvement support rather than choke the OEM with restrictive practices. In any supply chain, no real value is realized until the end product is consumed by the end user. All of the components and materials in a product are just that, until they are functioning to satisfy the final customer's need, which drives the supply chain demand. Everyone should be aligned to that end.

7 comments on “Registered & Screwed

  1. Barbara Jorgensen
    November 8, 2012

    Ken: As always, you've been able to clarify in no uncertain terms the problems with this system. In my experience, most OEMs don't even know about it and those that do find it time-consuming. Distributors don't want to nag their customers but registration is one form of “protection” (in theory) for the work they do. Suppliers don't like it because the compensation aspects of the programs are an accounting nightmare. I guess it's like democracy: it's the worst system in the world, except for all the others.

  2. FLYINGSCOT
    November 8, 2012

    Not many people like the registration process as it tends to converge on an optimal solution only for a limited number of people in the chain.  At the end of the day for everyone to succeed they all need to feel comforatble with the deal they are getting.

  3. bolaji ojo
    November 9, 2012

    Ken, Your analysis is thought provoking. In my case, I wonder if what's stopping the system from changing a structure we know is not optimal is that people don't like the alternatives or don't know which alternatives to pick and whether these would be better than what they have now. The fear of unknown fields can be paralyzing.

  4. Ken Bradley
    November 9, 2012

     Bolaji, Registration ties into a practice between manufacturers and distributors called ship and debit. If a part is registered with a distributor, they get a bigger refund(Debit) from manufacturer when the part is sold to the registered customer than any other distributor. As a result there is no competition between distributors.  This “figure out what your costs are after the product is sold” process restricts competition and adds complexity and cost.  A simpler process of buying from your supplier at a negotiated price and reselling to the customer at another negotiated price would be better and is the way most business works.  Registration and “Ship and Debit” are the anomalies.

    I see these overhead attracting processes as a means of price control by the manufacturer; no one else gains (most lose). I haven't met a distributor yet that is unwilling to compete on a level playing field.

  5. Barbara Jorgensen
    November 9, 2012

    Ken–you'd think that with all the technology we have that there would be a better way of doing things. Knowing distribution as well as I do, I can see why they'd want to protec themselves from design “poaching” or undercut-prices from competitors. At the same time, the residual effects of these practices (phantom inventory) have to be time-consuming accounting nightmares. As long as the channel manages this stuff, it's invisible to customers. But I wonder: if customers were aware of it would it matter? As long  as they were paying a fair price?

  6. _hm
    November 11, 2012

    What is the role of purchase department? Do not they look after this problems and help organization to reduce their cost or make their cost more realistic?

     

  7. Barbara Jorgensen
    November 12, 2012

    @hm: Purchasing should source to the engineers specs if the product gets designed in with a distrbutor's help. The problem is, in spite of purchasing's best efforts, something happens at the factory level. Often, decisions to sub something are made on the fly and purchasing may not find out about it until it's too late..

    The other scenario is yes, purchasing gets a better deal from another distributor. That is purchasing's job. But that alienates the distrbutor that did the design work. That's why supplier give designing distrbutors a preferred price on volume, so they won't be undercut and purchasing doesn't have to go elsewhere.

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