Calling the Shots in Component Pricing

With pricing for metals and ceramic materials on the rise and the inventory of semiconductor components growing, are we at the mercy of these trends when setting the prices we pay for electronic components? My answer to this is “Yes” as a community and “No” as individual companies.

Companies are not helpless in influencing prices; the situation is very different from what we experience at the gas pumps when filling our SUVs or hybrids. Prices on some components may be going up, but there is such a wide price variation among suppliers that a prepared company should be able to achieve cost reduction or at least minimize any increase.

In the 1970s, psychologist and tennis champion W. Timothy Gallwey wrote a book titledThe Inner Game of Tennis, based on his training techniques. He would play a game with his tennis students called “bounce, hit.” He would toss a tennis ball towards the student and have the student say “bounce” when he thought the ball would hit the ground and “strike” when he thought his tennis racquet would hit the ball — not when it actually bounced or hit the racquet. With his method, it wasn’t long before the body was following the mind.

This is the first example of sports psychology using vision that I am aware of. Now elite athletes routinely visualize their end objectives. Visualizing end objectives can also be a powerful force in transforming business. Getting a mental image of a compelling, desired future state and believing that it can be achieved drives organizational progress. Industrial psychologists often use the “I have a dream speech” of Martin Luther King Jr. to illustrate the power of vision. Dr King’s vision transformed society for the better.

So what vision or objective is in the heads of commodity managers when they negotiate pricing? I believe it should be aggressive target pricing that they have faith can be achieved. Amazingly, I have seen aggressive target pricing, when shared with suppliers, leading to prices being cut in half. While this level is not the norm, target pricing drives cost reduction.

How does one create this target pricing? Some companies pick a percentage cost reduction that they need. While better than nothing, it can leave a lot on the table. Other companies try to engineer a cost model of the supplier’s product, apply some level of markup, and get a price. This works but requires extensive knowledge of the supplier’s manufacturing process that is not available to all companies. It is also time consuming and expensive.

A new approach we developed at FreeBenchmarking.com lets you determine target pricing for your most out-of-line components. The target price is calculated from the assessment of spending competitiveness by commodity using our proprietary tools and database. Targets are calculated as if the component price is reduced to the same competitive level as the overall commodity. This gives you a target price that is in line with what your company has proven to be capable of achieving on other similar components.

This is target-pricing a commodity manager can believe in. I look forward to discussing this and other issues related to pricing during the EBN LiveChat scheduled for March 10.

So now the question is: During price negotiations, are commodity managers standing at the gas pump, or armed with a compelling vision of target pricing?

By Ken Bradley – Lytica Inc. Founder/Chairman/CTO

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