White Paper: Negotiating with Analytics

Historically, electronic component pricing has been treated in a very secretive manner. Since the early days of electronics, as vertically integrated companies began spinning off their component businesses or broadened their market by selling to others, it has been difficult to determine if the prices you are paying for components are competitive. Companies seeking cost reduction request quotes, reverse engineer devices for manufacturing costs, seek alternative suppliers to stimulate competition or check distributor’s website prices in pursuit of price knowledge. These actions are attempts to benchmark but, in the end, these traditional methods can’t answer two simple questions:

Are my materials costs competitive?, and Am I getting a good price on this component?

The operative word in the above paragraph is benchmark. As a staple of all management disciplines, benchmarking has been around for decades. Most commonly used in operational functions like manufacturing and logistics, companies have looked to benchmarking as a pragmatic way to improve performance in such disparate disciplines as design and customer support. Lytica brings this same true benchmarking rigor to the area of material cost within our clients’ COGS (Cost of Goods Sold).

Merriam-Webster defines analytics as the method of logical analysis. Analytics is emerging as a topic of study and a field of business opportunity for most of the big name consulting firms. Analytics is associated with Big Data and mining this data for new knowledge underpins the excitement around this specialty.

Lytica has been a pioneer in component price analytics and has amassed the world’s largest independent database on current electronic component prices. Our growing list of customers includes some of the most prestigious and respected corporations in the world. These are electronics OEM companies in market segments like Automotive, Medical, Industrial, Communications, Computers and Commercial as well as many top contract manufacturers (EMS), suppliers and component manufacturers. Our applications track actual current pricing paid by these companies for electronic components globally. Our competitors tell us that they are not able to do what we do. They refer to our methods as the logical progression of price analysis.

Lytica’s Intellectual Property has developed in the form of algorithms, practices and engineering techniques to enable us, through web based applications like Freebenchmarking.com and Component Cost Estimator (CCE), to assist companies in the selection of components and their cost management. This information has never before been available in one place.

Our analytics lift the veil of secrecy without breaching client confidentiality. Lytica operates independently of any suppliers and manufacturers so that our assessments, findings and recommendations remain objective. Our solution assesses your component procurement effectiveness and quantifies spending competitiveness. We use this competitiveness factor to derive statistical price estimates for your worst priced components. These calculations require massive amounts of data at the individual component level but yield very specific component-by-component recommendations; not high level and vague industry trend presages. This innovative insight supports negotiation in a way that has never been available before.

 

The new knowledge available to you is:

Your competitiveness quantified at both the overall and commodity level
Identification of your worst (most unfairly) priced components
Specific price targets for these worst priced components
Alternate manufacturers that could supply you with drop in replacement components, and Savings available to you by eliminating multiple prices on the same component due to coding duplication.

Most companies do not know their competitiveness level. We can tell you – free of charge and obligation – using our BENCHMARK REPORT, a quick (ten minute) exercise of filling in our Excel upload template and running our report. This is straight forward unless your pricing or Approved Manufacturers List (AVL / AML) data files are in poor shape. Our free report gives you your competitiveness level along with an estimate of target price savings, duplication savings and sourcing risk based on single sourced components revealed as submitted. As with any statistical process, the more data you put in the better the results. For true benchmarking, we require a minimum of 200 components for analysis with no practical upper limit. Larger samples take longer to analyse; a file of 500 components takes approximately 10 minutes.

The competitiveness result comes to you quantified as a percentage where 100% would represent Best in Class performance on every component. You can think of competitiveness as a ranking; if there were 100 companies and you were at the 66% competitiveness level, 65 companies would be paying more for what you are buying (i.e. same basket of goods) and 34 would be paying less. Many companies, thinking they are getting good pricing from suppliers, are surprised by their characterization score. It is very possible for a company at the 40th percentile to be paying twice as much for components than someone at the 85th percentile. This difference can be even greater when supply channel design is taken into account. Mark up from distribution, EMS and even manufacturers themselves enable wide variations in pricing on the same component. Low competitiveness companies often try to rationalize their position, arguing that special value added services explain their score when, in reality, most companies have essentially the same supply chain performance and service expectations of suppliers. In our experience their rationalizations do not stand up!

The individual component price estimates for each of your worst priced devices are provided with our Gold benchmarking report. This paid report includes price estimates for each of your top 25% worst priced components. The free BENCHMARK REPORT was designed to give you an estimate of the savings potential from renegotiating these components whereas the Gold report provides component level details in an Excel worksheet format. This lets you begin negotiations right away and, because these are your most unfairly priced components, you can realize relatively quick success in cost reduction. Our implementation experience is that these target prices are achievable about 75% of the time in negotiations. By achievable, we mean that the supplier has agreed to this price, a better price or a close to our target price. When our estimates are not achievable, it is usually associated with sole sourced components with little negotiation leverage or newly released components to market where client use is limited. Our benchmarking analytics are for production component benchmarking, not bleeding edge assessments.

 

Analytics based Negotation

Analytics based negotiations have significant advantages over traditional approaches. The first big one is focus. Lytica’s benchmark analytic tools identify mispriced outlier components; those with the most need for cost reduction. These are your top 25% worst priced components. With analytics knowledge, you are focusing your energy on components with the most potential for price improvements. The traditional approach takes a broad- brush sweep across all components, diluting your effort and effectiveness. Our Gold benchmarking product provides actual target prices for each of these components so that you do not settle for an intermediate price that is higher than you deserve.

Analytics based negotiation is also repeatable. Unlike annual negotiations, you can adopt a quarterly cycle to ratchet up your competitiveness to systematically outperform an annual event. Once you have reduced the cost of your worst priced components, you can repeat the process to identify the now new top 25% worst priced set. These next round components have price targets set based on your now more competitive purchasing characterization. The implementation of your first analytics based negotiated pricing has raised your overall performance. As you advance through progressive cycles, your targets become increasingly aggressive but within your proven level of achievement.

A third advantage is conviction. Our clients report increased confidence in negotiations when dealing with their suppliers. Clients tell us that their now data driven negotiation process increases their resolve and success.

Analytics based negotiations follow a predictable pattern. Since you are negotiating with their worst price components, these components are outliers. In many cases just bringing this price information to the supplier yields results in the form of a reduction. Suppliers know which components are their highest margin devices and will recognize that you have identified these products. They will find it hard to justify this privileged position going forward. Most make appropriate adjustments.

On several occasions, clients have come back to us asking for a re-examination of their data following rejection by their supplier of their price position. In the vast majority of cases, we confirm our estimate. Our customer, with persistence, gets an improved price.

Suppliers rejecting your price position may need persuasion. Some will challenge your targets and argue that no one is getting these prices. The most effective action that you can take to combat this is to get quotations from alternative manufacturers or suppliers of drop in replacement parts. These quotes should yield pricing close to our estimated target. Quotes can be either for qualified equivalent components or for unqualified drop in equivalent devices. Lytica’s Component Cost Estimator (CCE) application will identify these alternatives if they exist. Presenting these real alternatives to the incumbent puts their sales revenue at risk, and usually gets some degree of results.

Clearly, your first choice is to maintain supply with your current supplier but the reality is that you need cost reduction. You should switch supply to a qualified (or qualifiable) alternative if your current supplier is not working in your best interest and the new alternative supports your cost needs. If your existing supplier is intransigent, free them from obligations to you. Alternate, lower priced quotes usually lead to price concessions when the incumbent supplier realizes that you are serious. If the supplier forces you into alternate supply action, you should move the majority of your business to the new supplier. The inflexible supplier should be used at significantly reduced business levels. This supplier is not working in your best interests.

 

With distributors as suppliers, there will be no qualification costs associated with switching supply of the same manufacturer’s component. You are not changing anything technical, only the channel. Price should be the dominant factor in your supply decision unless you have concrete proof of additional channel value. There will be arguments put forward by the incumbent distributor about soft or intangible value that is included in the price. Make sure that you can quantify and justify the price adders associated with their supply. Confirm that the value added is actually something that you will use and, if the need did arise, know how you would use it. Verify that there are no less expensive mitigation alternatives. If possible, compare a direct price quote for the component with the distribution price. More often than expected, some very high mark ups are uncovered. Eight to fifteen percent over direct pricing is expected but 2 to 3 times (or higher) direct pricing is not.

Sole source components are the most difficult components to negotiate. Once the design decision is made, there is little negotiation advantage. One effective approach that often works is to tie existing component price concessions to new design award decisions. This requires coordination between the design and procurement departments, which is often hard to achieve in large companies.

Overall, we see negotiating with analytics as a win/win for suppliers and customers. We observe early adopters of this approach moving ahead of their competitors in both their competitiveness scores and product cost structure. In the case of suppliers, we see them cutting overhead costs, improving margins and improving their win/loss ratio.

Negotiating with Lytica’s benchmark analytics puts you a generation ahead. There is nothing quite like data driven, fact based processes to underpin exceptional performance.

White Paper – Negotiating with Analytics: By Lytica Inc.

Download: NegotiatingWithAnalyticsWhitePaper

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