Front End I Electronic Components Supply Network
Competition and price – what is the right price
Lord King, the highly regarded businessman who in the ‘80s was credited with saving British Airways once famously quipped that to improve profitability his organisation needed fierce competition amongst its suppliers and a monopoly on delivery. Little has changed in the in the intervening years and the roles of the Procurement and Marketing departments remain diametrically opposed. Marketing seeks ways to maximise price while Procurement seeks to minimise it. As supply tightens in electronic component markets ecsn chairman Adam Fletcher suggests that the issue of price in the short, medium and long term is worthy of further consideration
first published the 1970s and still in print today. Purchasing and Supply Chain Management, by Dr. Brian Farrington and Dr. Kenneth Lyons defines the “Five Rights of Procurement” as “right: Quality, Quantity, Place, Time and Price”. They correctly asserted that the “Five Rights” are closely inter-related and suggested that right price should always be placed last on the list because it is often the sum of all the other related variables. Marketing department executives are
Adam Fletcher A
ll commercial organisations in the global electronic components market aspire to make a profit
and to do this they must successfully manage all aspects of their business. The agreed selling price with customers is a critical factor but managing it is a continual challenge. They may not recognise it but all organisations including those in the Electronic Equipment and Electronic Components markets are influenced in some way or another by established procurement and marketing principles, some of which go back almost 50 years. Procurement Professionals are still guided by a treatise
10 December 2018/January 2019
still guided by classical rules of marketing initially laid down in the 1940’s but which really came to prominence in the 1970s when Dr Philip Kotler’s book “The Principles of Marketing” was first published. Kotler suggested that the 4Ps of marketing mix – “Product, Price, Promotion, and Place” – should be applied in strict order and that modifying any one of these elements had the potential to change the marketing dynamic. It’s interesting that Kotler placed “Price” high in his list but he didn’t believe it was the most important. He argued that the “Product” first had to be developed based on satisfying the needs and aspirations of the customer and had to function as intended to have any chance of success. He also asserted that the three other Ps – Price, Promotion and Place – should accurately reflect the product’s market positioning.
Loss of control in commodity markets Some manufacturers however, struggle to successfully manage the entire marketing mix for their output in global markets. Procurement organisations are very adept at leveraging their commercial advantage to reduce the quoted price,
Components in Electronics
which together with the sometimes dubious behaviour of intermediaries (brokers) seeking to gain financial reward from arbitrage in the market, can lead to market distortion. Obvious examples are high-volume legacy merchant market commodity electronic products such as MP3 players, DVDs, Digital Cameras, USB Memory Sticks, computer memory etc… Here the market effectively dictates the price it’s willing to pay. The manufacturer has almost no influence over promotion or place and merely has to decide whether or not to continue to supply.
Ongoing negotiations Many procurement organisations invest significantly in supplier evaluation tools to help ascertain if their partners are meeting the Five Rights of Procurement in the specified and/or agreed mix. Understandably most effort is focussed on the highest value products, where the impact on procurement cost can be significantly greater. A performance review based on the five procurement rights are examined by both parties who agree a plan of action with the aim of fully meeting the buyer’s expectations, which often include a reduction in the price to be paid and penalties for any non- performance. It’s a case of “heads I win, tails you lose” for buyers, because they will rarely agree a price increase even when the supplier exceeds customer expectations of performance. This focus on higher value products unfortunately often means that market intelligence concerning the lower-cost items that easily make up >70 per cent of the components on the BOM (bill of materials) gets overlooked. These products are often multi-sourced so in theory buyers have the security of knowing that another supplier can easily be brought online when needed. But if the problem relates to a merchant market commodity product over which no manufacturer has control and where a number of suppliers have resigned from the market, major supply problems can result.
Market price failure A great example of marketing and procurement departments failing to manage the market can be seen in the problems currently effecting availability of some very inexpensive legacy larger-case- size MLCC and chip resistor components. As the epitome of merchant market commodity products, pricing of these products is dictated by the market and cannot be controlled by the manufacturer. Price erosion has made it commercially uneconomic to produce
these parts and many manufacturers have been forced to exit the market. Those that remain are strongly recommending that customers redesign to the newer high-volume, small case size, high performance products they’re producing to meet demands elsewhere in the market. It’s a double whammy for Procurement! Quoted manufacturer lead- times for these legacy parts has been gradually extending over several years and stand today at 26+ weeks and often longer, and at a time when the price of parts that can still be sourced is rapidly rising. This situation is certain to continue until supply begins to meet demand but sadly I see little evidence of the necessary additional investment by manufacturers. However un-palatable it may be a redesign and requalification may well be the best and lowest cost solution to what is already a major industry issue.
Use of proprietary components increasing The underlying industry fundamentals in the electronic components supply network are changing as a result of a slow-down in semiconductor scaling, with hugely increased costs and on-going M&A activity within the industry. This is resulting in the increased focus on production of proprietary products with additional functionality rather than commodity products. The good news is that in the medium-to-long term pricing for most semiconductors will become more stable over their life-cycle and will not follow historical price declines. This will also improve their longer-term availability for customers as profit margins for the companies that produce them will be enhanced. It’s critical that marketeers in component manufacturing companies ensure that products produced provide the features that customers want and need, priced at an effective level and promote their use in end-applications both directly and via their authorised distributors who engage with a global customer base. Buyers need the right quality components, in the right quantity, delivered at the right time to the right production locations and at the right price. The dilemma as always is arriving at a price acceptable to all parties that represents the value of the component within the market and that will only be achieved by diligent market monitoring and effective collaboration with all your partners both up and down your organisations electronic components supply network.
www.ecsn-uk.org www.cieonline.co.uk
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