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