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Who Benefits From Component Price Secrecy?

In a recent blog, I attempted to dispel the myth that there is a clear relationship between volume and price of electronic components. Many still find this hard to believe. They hold to the idea that price is somehow tied to manufacturing cost, which is related to volume.

This is rarely the case in the electronic components world, and it is also not typical in everyday life. Gas prices fluctuate daily, yet we know that there has been no change in the cost of its production at the wells or refinery. Market speculation drives price change, not the amount of oil in the ground or the cost of getting it out. Other examples include cosmetics, prescription drugs, restaurant meals, and entertainment. Housing is another great example.

People hold to the price/volume belief with electronic components because of the lack of visibility on what others pay. Why isn't there transparency on these prices? Who gets an advantage from this?

Big box electronics stores show the prices of their products on their shelves and Websites. Oil companies display the price of gas on large displays at their stations, and commodity materials (copper, silver, gold, etc.) have prices published daily in newspapers and on numerous Websites, but electronic component prices are hidden in a shroud of secrecy. Why?

Europeans and Americans are traders. In trading, you exchange one good for another. When the trading parties are satisfied, they accept the deal. Both sides believe the value they are receiving is equal to or better than what they are giving away. Is a goat worth five chickens? Is a capacitor worth 10 cents? None of this is based on manufacturing costs. Most traders also shop around. Can I get six chickens for my goat? Does Best Buy have a better price than Sears? We all do this, and we don't make a buying decision until we have analyzed the data that transparency provides. With transparency, we may even ask the retailer to match or better someone else's price, so we don't have to drive across town again. This is hard to do with electronic components, where we have little or no idea what someone else is paying.

When I was chief procurement officer at Nortel, I would get pricing surprises all the time. Suppliers and my staff would tell me I was getting the best pricing, only to find component pricing on some quotations coming from electronic manufacturing services (EMS) companies. Overall, I had very good people and good pricing, but I never knew for sure. When I would test the market, I would often be surprised. There was no transparency in my pricing, and when I would attempt to create it through outsourcing or benchmarking, I would always find opportunity.

What's really interesting is what I have discovered mining the freebenchmarking.com database, including the data I used for the myth-busting graph I showed in my previous blog. Here are some other lessons:

  • Many companies think they have great pricing but don't.
  • Too many companies have single sources when alternatives exist.
  • Many companies pay a high price for security of supply by allocating too much volume to less competitive second sources.
  • Many companies that think they have alternate sources really don't, because those sources are tied to the same supplier or factory.

It's amazing how liberating knowledge can be.

10 comments on “Who Benefits From Component Price Secrecy?

  1. Barbara Jorgensen
    May 29, 2012

    I'll admit I'm having a tough time separating myself from the volume/pricing mindset. As you point out, transparency is key. Now, when auto shopping, you don't even go to the dealer until you have researched everything about the car online. That has been a huge value to customers.

    Just curious: If you eliminate the volume-pricing equation, how do companies explain huge discrepancies in price? I'm sure there are services involved, but what are some of the other factors?

  2. Houngbo_Hospice
    May 29, 2012

    Hi Ken,

     

    “It's amazing how liberating knowledge can be.”

    It is good to have the right information in order to make the right purchasing decision.

    When you cannot not prevent component price secrecy, you can at least look for many options before committing to buying.

     

  3. _hm
    May 29, 2012

    @Barbara: I concur with you. It is difficult to comprehend this new concept. But it is nice to know that they do work in real world. 90% of time volume/price works. In 10% special opportunity, you get much better deal and you can grab it if you have money power. But in geenral it sholud be volume Vs price.

     

  4. tioluwa
    May 30, 2012

    Interesting thought here,

    but I'm asking the same question as Barbara:

    So what determines price is Volume is not the key factor.

    It seems that many markets are being controlled by assumptions.

    Many used to attribute China's low manufacturing costs to cheap labor, but facts coming out is teaching us otherwise.

    So in the this case, what really are the factors that determine price?

  5. FLYINGSCOT
    May 30, 2012

    I see prices set firstly by the competitive landscape.  If there is no competition then it is set by the price the customer can bear.  After that is is the GM requirement of the supplier.  I do tend to agree that the prive-volume relationship is not a hard and fast one.

  6. tioluwa
    May 30, 2012

    I think competition is quite high in the components industry, we have a good number of major players, all manufacturing the same of similar products, so i don't think it is the major determining factor in component pricing.

  7. Anna Young
    May 30, 2012

    Fascinating! I'm curious to know, what then determines the price of the electronics component? And how can this be made transparent? 

  8. stochastic excursion
    May 31, 2012

    I read somewhere that price tends to locate itself somewhere around cost of goods plus a margin prevailing in the industry.  For a monopoly or niche player, though, the margin can be more aggressive.

  9. Ken Bradley
    May 31, 2012

    Barbara, Many of your readers partially answered the question you posed about explaining the huge discrepancy in price. I think I will make this topic of my next blog and address it in more detail but the term competitive explains a lot. Competitive environments have better pricing. Things that make markets less competitive tend to enable higher prices. Things that diminish competitiveness like single sourcing, industry regulations (like in medical) making component substitution difficult and military approvals lead to higher price environments. I remember examples of very expensive hammers and toilet seat lids being sold to the military. Also when companies focus on cost, they also get better pricing.

    When we benchmark in Freebechmarking.com, we try to set conditions so that we are doing as best as possible apples for apples comparisons and not including other value added services. We see wide discrepancies in price for essentially the same things.

  10. Barbara Jorgensen
    May 31, 2012

    I just gave myself a “dope slap”–competition is of course a key factor in pricing. Thanks readers and Ken! Most components do have a healthy competitive environment. Which brings me to my next thought: DRAM. As players exit the market and/or go out of business, pricing fluctuates. Does anyone see DRAM prices increasing and stablizing as we see more Elipdas?

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