How to Keep Your Procurement Blood Pressure in Check

This blog is for my readers in procurement with home blood pressure gauges. Warning: do not act on this blog if you have high blood pressure or have failed your anger management class!

Select a day when your blood pressure is normal and you are in particularly good spirits. Do the following three things:

  1. Ask your contract manufacturer for a list of all components on your Bill of Materials that are registered along with how much cost reduction you have achieved on each component since the product was launched.
  2. Ask your Director of Sales how much your average selling price has come down since you launched your product, and
  3. Put your blood pressure gauge on and compare the two.

Now, with the blood pressure gauge still on, ask your engineering team if they were aware that your company had been registered and to identify specifically what work each supplier with the registrations did to justify your being registered.

What you will most likely find is that your product’s average selling price has dropped, that you have had no cost reduction on registered components and that no one knew that your company was registered. If you haven’t had a stroke, remove the blood pressure gauge and take a few deep breathes.

What is registration?

Registration is a process where distributors who have provided you with engineering services at some undefined level are able to enter into an arrangement with the manufacturer so that they purchase components at a lower price than their competitors. This means that no other distributor can compete and the distributor with your registration is assured your ongoing business. This lower price to the registered distributor is achieved through a ship and debit process. With ship and debit, all distributors start with close to or the same price but the one with registration gets a credit whenever registered material is sold to you. Note that this lower price is not necessarily a fair market price or even appropriate price for you; it is the one you are stuck with forever.

Registration is a process that I have issues with and am surprised that it has not lead to prosecutions under anti-trust legislation. Here are my issues:

  1. You are registered without your knowledge and no proof of having provided engineering services is required by the company claiming the registration.
  2. You are not given the option of paying for these engineering services as an R&D charge. Instead, you are burdened with a high price throughout the component’s useful life in the original application and in any subsequent application where it is used.
  3. There is no competitive environment created between distributors as prices are essentially fixed.

I have one customer who, on discovering just how many of his components were registered and the premium that he was paying to market, called all of the development engineers into a conference room to show them how much the twenty dollar lunch that the distributor had bought them was costing their company; it was millions of dollars. He is going a step further and asking the manufacturers for proof that the distributors holding the registration actually did any value added work. Without evidence, he will ask for deregistration and may block design access to any manufacturer that implements an anti- competitive, restrictive pricing practice on his company without his approval.

I am not saying that these manufacturers or distributors are bad people; only that they have a bad process which is not aligned with the interests of their customers. Given that the electronics products customer is the conduit through which the component flows to an end user, I expect the component manufacturers to support the product company at time of product introduction and throughout the product’s lifecycle. After all, no real value is created until a product is at the end user stage.

If my thinking is wrong on this, let me know. Otherwise, I will keep my blood pressure gauge nearby.

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

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