If the supply chain psychiatrist were to run a word association test, the expected answer to associate with the word registered would be screwed!
While this may sound harsh, many OEMs are unknowingly caught in a registration system that has long-term consequences for materials cost. Registration is a process, used by manufacturers, which rewards a distribution or representative company for providing engineering services to OEM customers. Once registered, the lowest price that the OEM can obtain is through the registered channel, which belongs to that distributor or representative, assuring that the company providing the engineering service gets the business.
While fair in theory, this practice kills competition. Many OEMs believe that this registered price is a “best price” — which, of course, it becomes — as they will no longer be able to find better pricing. It is not, however, a marketplace best price or even necessarily a fair price for them. The problem is made worse by the fact that customers are stuck with registered pricing whenever they buy that component, whether it is for that initial product or any subsequent products that use this component.
Of the OEM companies that understand registration, I had found none that like it; contract manufacturers hate it, and even some distributors dislike the process. It attracts overhead and adds to costs, let alone killing competition and competitiveness. I am actually surprised that this practice of registration hasn’t been investigated and stopped under US antitrust legislation, as it is certainly not working in favor of the consumer; in my view, it has all the earmarks of price-fixing.
In addition to eliminating competition, the problems that I have with registration stem from the fact that many companies don’t know that they have been registered and that application engineering support accepted by the OEM’s design organization becomes a cost penalty for the entire life of the product. It is hard to believe that companies can get locked in without knowing, but they can — and do. Further to this, at times there is a feeding frenzy with representatives and distributors trying to be granted an OEM’s registration even when their contribution is minimal or non-existent. Not exactly behavior to be proud of.
It is the long-term nature of registration that really irks me. Many companies have policies that prevent the amortization of R&D costs into the cost of goods sold. These companies pay for tooling upfront or expense and pay the price of design services. They gain from this in two ways; first, they expense the R&D in the year it occurs, and, second, their product cost is the real cost of manufacture. As their gross margins correlate with stock price, shareholder value is not reduced by hidden R&D amortizations. When components are registered, the R&D cost is put into the product cost without the OEM being given a choice. To me, this is just plain wrong.
Registration is usually associated with sole source, high intellectual property components. I would like to suggest that manufacturers change or eliminate their registration processes. Here are some thoughts:
- Ask customers if they want to use the registration process or pay for the services upfront
- If registration is chosen, limit the term of registration to a length of time suitable to recover the non-recurring engineering charges incurred
- Verify with the customer that the company trying to register an OEM has actually provided a service worthy of compensation or registration. (Having the distributor or representative produce OEM-signed timesheets as proof would be really cool.)
For OEMs caught in a registration dilemma and unable to achieve any level of cost reduction — work directly with the manufacturer. Gather every element of negotiation leverage that you have to drive cost improvement with this manufacturer. The most effective leverage I have seen is to restrict or prevent significant new design awards to the manufacturer until they address your cost needs.
In my view, manufacturers should be working to help their customers succeed. As economic conditions change and the OEM’s need for real cost improvement increases, manufacturers should step up with cost improvement support rather than choke the OEM with restrictive practices. In any supply chain, no real value is realized until the end product is consumed by the end user. All of the components and materials in a product are just that, until they are functioning to satisfy the final customer’s need, which drives the supply chain demand. Everyone should be aligned to that end.
By Ken Bradley – Lytica Inc. Founder/Chairman/CTO