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The Cost (Not Price) of Being Global

In the realm of “things that would make supply chain management easier,” global pricing would be at or near the top of the list.

Imagine: You are a buyer, and no matter where in the world you purchase a component; no matter what currency you purchase it in; no matter which distributor you purchase it from… the price is the same.

But global pricing is still an elusive target for the supply chain. There are structural reasons — the way business is conducted — and there are perceptual reasons. Let’s look at perception.

The No. 1 reason global pricing is difficult is because customers expect prices to differ from region to region. About 10 years ago, someone came up with the notion that manufacturing stuff in China will make it less expensive because wages in China are lower. It’s true that wages are lower, but it’s not true that everything made in China is automatically cheaper. Moving components in to, out of, or around China carries a cost. But customers expect prices to be lower in the Far East; therefore they are loath to pay US- or EU-level prices. So to remain competitive, component makers lower their prices — in the Far East.

The No. 2 reason global pricing is difficult is fear. Component makers and their resellers fear that “global price” will become the equivalent of “lowest price.” The lower the price, the lower the profit margin. The lower the profit margin, the harder it is to make a buck or a euro or a yen on a component sale.

This is a valid fear. What buyer wouldn’t source components from a low-price region if they could? After all, that’s part of their job — to keep costs low. The problem is: Price and cost don’t mean the same thing. The cost of sourcing a part from Asia could ultimately be higher than the component’s listed price. And until the supply chain can negotiate terms on the basis of cost and not price, global pricing remains elusive.

11 comments on “The Cost (Not Price) of Being Global

  1. bolaji ojo
    October 1, 2010

    There are numerous reasons why prices differ from one region to the other, including the extra costs that companies must charge when moving products from one location to another. Then there are the local compliance requirements that suppliers must comply with by region, countries, and in the case of the United States even by states and localities. Complying with local rules, regulations and taxes may even drive up prices relative to other locations.

    It's the same reason a Toyota Camry may be more expensive in California than in Florida. For this reason alone, I suspect it will be extremely difficult to have one flat pricing standard notwithstanding the location. Then there are other subtle issues that suppliers must factor in, such as the bargaining power of the buyer. With their huge COGS and resulting equally hefty purchasing powers and the fact they require enormous volumes as major buyers of electronic components, companies like Apple, Cisco, HP, Lenovo, Nokia and Samsung may be able to command lower pricing than a small OEM in Ireland. Still, I agree having more transparency in global pricing could help mitigate the wild demand-supply and cyclical swings common to the high-tech sector.

  2. Barbara Jorgensen
    October 1, 2010

    Actually, some suppliers, such as National Semiconductor, have established what they refer to as a global published price. This price acts as a baseline, and leaves room for differences in contract pricing (either higher or lower than the published price) as well as preferred pricing for distributors.

    I should also point out that global OEMs that have direct relationships with suppliers effectively have a global price, but it is specific to the OEM and usually confidential.

    The main benefit for a global price would be consistency in quoting BOMs: regardless of whether the quote originates in the U.S. but is fulfilled in Taipei, there would be less volatility in baseline pricing. Distributors report their customers are often surprised when a BOM quote differs significantly from their expectations.

     

     

  3. hmleng
    October 1, 2010

    Global pricing has its ways or tricks to be set.

    Supplier usually will provide a global pricing from the country of origins of the parts to be shipped so as to set as a baseline pricing, and respective sites when doing their costing, will need to factor in other costs of supply chain into the total materials cost.

    On the other hand, sometimes, due to other conditions, like different payment terms, thus the pricing once again will be different…but again..as mentioned, it acts as a baseline allowing “global access”, then dependign on different sites business model, it can be customised into “local treatment”.

     

     

  4. Barbara Jorgensen
    October 1, 2010

    Excellent points all. In fact, the topic is so complex I'm going to devote a future blog (or blogs) on how the industry's business structure–P&L is still measured on a regional or local basis–makes it difficult to achieve global pricing. There are perception factors, but there are structual issues to tackle as well.

    Thanks for your feedback!

  5. TomV
    October 1, 2010

    Barbara,  There is so much complexity to this issue that we could fill a book on the subject.  Thre is so much pricing pressure within companies and illogical directives regarding price masking, rebates, “most favored” pricing, “must be 10% lower than any other customer” etc.  Add in the games played with Incoterms and it makes it impossible for a supplier to manage a simple price book.  Much of this is self-inflicted by the customers with the EMS and OEM sectors gaming the system for advantage.

    Thanks for bringing this subject up allowing comments

     

    TomV 

  6. Barbara Jorgensen
    October 1, 2010

    TomV–Thanks for weighing in. This topic is so complex I'll definitely be devoting future blogs to the discussion. As you point out, every partner in the supply chain has their own business interests, which makes any kind of price alignment difficult if not impossible.

  7. bolaji ojo
    October 1, 2010

    I believe it was the same subject that tripped up microprocessor supplier Intel Corp. with antitrust authorities in the United States, Europe, Japan and Korea. The company was alleged to have offered some of its customers, like Dell, preferred conditions that rival Advanced Micro Devices Inc., said hurt its chances of winning business with the OEMs. Obviously, this subject is of concern to everyone in the supply chain. Sometimes, pricing strategies become a competitive weapon that can cut both ways.

  8. Tunrayo
    October 7, 2010

    Barbara,

    I would like to add that another significant obstacle to uniform global pricing is the fluctuation of currency markets. Global companies as well as their partner OEMs can suffer substantial loss (or gain) in revenue due to fluctuations in exchange rates.

  9. Barbara Jorgensen
    October 7, 2010

    Hi Tunrayo,

    Someone had mentioned that to me, as well as the fact there is no global currency either. I hadn't given a lot of thought to currency fluctuations, but now it seems obvious that's a factor. That's something I'd like to pursue in future blogs–who has to deal with those? The buyer? or is it calculated at the corporate level?

  10. Ashu001
    October 10, 2010

    Barbara,

    I must say this blog post was really fascinating and the difference between Cost and Price which you illustrate so succintly here struck me like a Lightning Bolt from the Sky!!

    There are two more  factor which prevents Costs from being Global.

    1)Currency Volatility-We are today living in an agewhich the IMF chief calls as the Age of Currency wars where Currencies fluctuate dramatically against each other every month.In that sceanario the price which a Manufacturer quotes today and what he quotes next month maybe completely different.(For instance over the last one month the Euro has risen by about 4% vs the US Dollar).

    2)Govt Regulations-We have to understand the more intense the Regulatory scrutiny and costs for Compliance with it in that country,the Higher will be cost in that country.One example here,after SOX was implemented in America,the Number of Listings on US Stock exchanges from International Companies declined and instead moved to London,Hong Kong or Singapore.The reason-companies don't want to comply with the onerous and burdensome US Regulations.

    This is a choice which companies are going to make every single day with increasing regularity.

    Regards

    Ashish.

  11. Barbara Jorgensen
    October 11, 2010

    Thanks Ashish! Obviously, I find this topic interesting and the more I hear back from the industry the more I'm aware of the complexities. The point you make about SOX is an excellent one–I doubt many in Congress understood the costs of SOX, not just the companies' compliance but how those costs will be passed on to shareholders, customers, suppliers and the manufacturing base. U.S. policies continue to make it more difficult to do business in the U.S. Nobody disputes that SOX was the right thing to do, but I wonder how much cost analysis was done before votes were cast?

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