Is global pricing a pipe dream?
A single, global price for a component may be simple in concept but it is tough in execution.
By Barbara Jorgensen, Contributing Editor -- EDN, March 30, 2010
In the global supply chain, it’s clear that one size does not fit all. But there are times when consistency would greatly reduce the complexity of worldwide sourcing relationships.
For a decade or more, global pricing—a uniform price for a component no matter where in the world it’s sourced—has been a concept suppliers, distributors and customers agree on in principle. But getting to that point is so complicated it seems the effort will be stuck in limbo for some time.
“Like many elements of the global supply chain, global pricing can be complex and requires discipline and cooperation between business partners,” says one chip executive. “‘Price’ cannot be viewed in isolation if other terms/expectations vary by region of the world.”
A single global price would significantly simplify transactions in the supply chain. Suppliers and distributors could dispense with “ship from stock and debit”: a practice that helps account for differences in regional pricing but doesn’t reflect actual inventory levels. Quoting a bill of material would be easier. Distributors could more easily be compensated for assisting in a design created in Dallas but manufactured in Beijing. And OEMs could use the resources spent on price negotiations for revenue-generating tasks.
Accounting practices aside, global pricing would simplify matters as customers shift manufacturing from one region to another. “Customers are asking us to pick up their supply chain as they move from the Americas to China,” says Gerry Fay, senior vice president, Avnet Supply Chain Solutions worldwide. “They want to pipeline inventory to where they are moving. Difficulty arises when a distributor has a franchise in one region but not the other. We may carry the product they need in North America but not carry the product in China. Even if we ship that product from North America, the price might be different in China and there are costs associated with transportation, imports, and export.”
In short, the “global” electronics industry isn’t as global as everybody thinks. Even though many suppliers, customers, and distributors have established footprints in major global markets, manufacturing components in different regions has different overhead costs. Transporting those components in and out of markets isn’t free. Many customers still negotiate price on a regional basis. So it’s tough for a supplier to build all these factors into a single worldwide price. “Global pricing may come about,” says Eric Sussman, distribution director, Americas, for connector maker Molex Inc. “But it’s not there yet.”
Conceivably, a global OEM with enough purchasing clout and a centralized sourcing operation could negotiate a single (and preferred) price with a component supplier. Under the right parameters—the OEM locks prices in for a year, buys the parts upfront, warehouses them, and manages their flow through the supply chain—that price can remain stable.
The problem is that very few OEMs operate under this model. Chances are, a distributor or another logistics provider receives the component shipment from the supplier’s factory, breaks up bulk packaging, repackages the order, and delivers it to the OEM’s manufacturing facility. It’s even more likely that the OEM’s factory really belongs to a contract manufacturer. These variables all affect the cost of the component and put distributors and suppliers at a competitive disadvantage.
For example, distributors receive products, break up bulk, and repackage and ship orders all the time. But providing these services isn’t free: distributors invest in people, operations, IT, equipment, and inventory. They—and their suppliers—also expect to make a profit. While an OEM might pass a preferred price on to a distributor, a distributor’s cost to warehouse and manage that component might be different. Distributors have to account for the services they provide. The result: end prices look higher.
Outsourced manufacturing presents a different dilemma. EMS companies frequently deal directly with suppliers on commodity items to negotiate large volume discounts. In some cases, an EMS might have a lower per-unit price than the OEM. The EMS might pass that savings on to the OEM. The OEM could use such information to negotiate an even lower price with the supplier. The result: supplier profit margins erode.
Channel executives say there’s one way global pricing could work: separate the per-unit component price from the service costs. This could enable suppliers to charge a single global price yet allow service providers to charge appropriately for their services.
This “fee for service” concept was tried more than a decade ago and it didn’t catch on. Customers are accustomed to seeing component prices “bundled” with services to reflect a total cost. Channel players agree that “price” and “cost” is not the same thing, but price is usually the basis of a supplier-customer sourcing relationship. Additionally, industry executives point out, a “global” price doesn’t necessarily mean the lowest price.
“When it gets down to the details, [global pricing] becomes difficult,” says Fay.
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I am an involuntary pioneer in global pricing. In 1983 I got a request from Saudi Arabia's University of Petroleum & Minerals Director of Purchasing for delivery of electronic parts, arranged by a former boss of mine who then was assistant professor at that university.
While friends of mine told me that a hammer bought for 5 bucks will be sold in Saudi Arabia for 50 bucks, and my former boss, I guess, intended I make a fortune with that delivery, I thought that it is possible for the Director of Purchasing to know the original prices and offered moderate prices, just covering my efforts.
Now I am sure that was a novelty in those times.
Dirk Bruehl - 2010-1-4 11:43:00 PDT -
EXCELLENT!
Great insight to an ongoing challenge. We work with the EMS industry on this subject and, to add to the "facts of life" you point out, we also see a very high degree of diffuciult in execution with regard to deploying pricing information accross a multi-facility operation. Even in North American, the various divisions CM's have trouble executing on contract pricing.
Part of the problem is matching the many primary (often customer) part numbers to the MFG part number. And, the AVL may have multiple options, which may or may not have a contract price.
Back in the day of SCI's global procurement in AL, a distributor reported that the same "A" items would be bought, scheduled in, scheduled out and cancelled, all in the same day-- under different primary part numbers!
Good stuff. The solution IS a gold mine.
Cheers.
Walt Grischuk - 2010-31-3 05:53:00 PDT
