Analytics is an in-vogue topic of leading consulting companies today. Despite its trendy name and popularity it seems that, once again, operations personnel need to relearn an old lesson; companies and individuals who use data outperform those who don’t.
In the supply chain, I am seeing a third wave of this realization emerge. The first wave was related to quality, the second to operations with lean and, now, the third pertains to pricing and negotiation. The realizations are the same; decisions and actions must be based on data.
After World War 2, an American statistician went to Japan and altered the redevelopment of that country significantly. Dr. W. Edwards Deming used statistical methods to set Japan on a path towards exceptional quality performance. In America at that time the focus in manufacturing was on demand fulfillment. Output was often of poor standard but the supply need was so great that companies prospered even with low quality.
When Japanese imports began filling American needs in the 1980s, their superior quality decimated many industries; electronic products and automobiles come to mind. When American industry finally woke up there was a rapid adoption of data driven techniques such as SPC and Six Sigma to restore competitiveness.
The Japanese had not only learned about quality; they took their data centric findings and applied them to all aspects of design and manufacturing to attack waste and non-value added activity. This thrust improved financial and operations performance significantly. Many new techniques and philosophies emerged such as Poka-yoke and 5S which, along with others, have since amassed into a manufacturing philosophy and set of data driven practices now referred to as Lean Manufacturing. Companies not using this philosophy are seriously disadvantaged.
Given that the last two waves of operations improvement were data driven, I am intrigued that many companies are missing the next data driven opportunity – a third wave of productivity enhancement based on price transparency. Why is it that many companies believe that their materials costs are competitive when they lack confirmation through data? When their beliefs are tested the data most often says otherwise.
Like high blood pressure, high pricing can be a silent killer. Sooner or later all companies must compete on price. Product and service differentiation that allow for high prices are always under attack by competitors and, at some point, a superior offering to yours will be available in the market. When this happens you must be able to drop prices to compete while you regroup to add new differentiation to your product. Since you never know when a strong competitor will emerge you must always strive to be the low cost producer in your market space.
None of the standard financial and operational metrics will tell you if materials pricing is too high. When material prices are high by 10%, your inventory value will be higher but so will your cost of goods; inventory turns will look normal. Margins will be lower but you won’t be able to specifically attribute the cause to the cost or revenue side. You know the arguments; sales gives away too much price, operations isn’t cost effective. SWOT charts won’t show materials pricing as a weakness and hopefully your ego won’t be showing it as a strength.
This third wave is enabled by independent price benchmarking available through low cost web services like Freebenchmarking.com and Component Cost Estimator (CCE). These two applications draw on the world’s largest independent database of current electronic component prices and provide component level details on market pricing. Companies can benchmark their current materials pricing and take corrective action on prices that are out of line for their competitiveness level. These applications outperform most analytics tools in ease of use, time to results and payback.
As a leader in this field, and the developer of these applications, Lytica has observed some common traits amongst customers since the launch of Freebenchmarking.com 3 years ago:
- Companies that use data have better pricing than those that don’t. This is also noticeable within companies where different commodity managers have data centric or non-data centric approaches to negotiations.
- All companies have some poorly priced components. Pricing is usually very good where companies have focused efforts; without focus prices drift up relative to market. Customers utilize Lytica tools to highlight areas of opportunity and optimize savings.
- Most companies do not prioritize data quality and, as a result, are missing out on opportunities for direct and indirect savings.
- Most companies are operating with high levels of risk (30% average) from unnecessarily single sourced components.
- Companies that use Lytica tools become addicted to what transparency enables. They find novel ways to turn their previous weakness into a competitive strength.
If you were late catching the first or second wave, don’t miss the opportunity to ride the third one to success.
Ken Bradley is CEO at Lytica Inc., a provider of supply chain power tools to OEMs, component sellers and distributors in the electronics manufacturing industry. He previously worked as chief procurement officer at Nortel Networks Inc.