Purchasing: Do You Really Understand Pricing?

Since my company, Lytica Inc., introduced analytics based price prediction for electronic components, many major EMS and OEM companies have saved millions of dollars by applying this technology to their materials spending. As with the disruptive technologies described by Clayton Christensen in The Innovator’s Dilemma, those stuck like deer in the headlights clinging to a past paradigm, miss opportunities to their detriment. I think this comment applies to many component suppliers.

The initial reaction by too many suppliers is to see only that their margins erode, causing them to focus on their loss. In reality, our technology only identifies mispriced components; the outliers for which pricing is too high for the market.

Another of my companies, Silecta Inc., helps clients negotiate and implement pricing in their supply chain. What amazes me is that we reject over 60 percent of the quotes we receive because the pricing is not competitive. These are tier 1, industry-leading companies that insist on quality, service levels, total cost of ownership and all the rest. What other process in the world would accept a 60 percent yield loss and do nothing about it but complain?

I think the problem is that suppliers look at this from a win/loss perspective rather than as a yield. Any manufacturing process with a 60 percent or worse yield would get all kinds of attention and would only be sustained if the product made with it was bleeding edge and supported high margins. This is not the case with quotations. These quotations represent real business (not a data gathering exercise) which the competitive suppliers are winning.

A supplier with a low quote yield must have issues; they either:

  • Don’t understand market pricing,
  • Are greedy and have margin expectations inconsistent with their industry segment, or
  • Don’t want the business and are afraid to tell their customer.

In any case, they are wasting their money and their customers’ time. Not understanding market pricing seems to be the most reasonable answer and flags a serious problem. If suppliers don’t know what a valid market price is for customers on 60 percent of their quotes then they likely don’t know on the other 40 percent either and are giving away margin with too low a price on many components. Why give a customer at the 70th percentile of competitiveness a 90th percentile price? There is an excellent chance they would have accepted a quote at the 70th percentile if the supplier had known what that was.

There is no reason why a supplier cannot apply analytics price prediction technology to move their yield up to winning levels. The perceived loss suffered from not selling components at outlier prices would be more than offset by volume increases at fair market pricing.

It would appear that the supplier’s dilemma is not a dilemma after all but an opportunity.

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

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