Not benchmarking your electronic component spend? If so, continuing to disregard this critical diagnostic at your own risk.
Quick. Name 1 inherently deflationary commodity. A commodity that, apart from the ebbs and flows due to supply and demand, always gets cheaper. The broad answer is electronics; more specifically – an integrated circuit (IC). This month marks the 50th anniversary of Moore’s law, and with this blog I want to cover its implications to cost savings. Savings that are glaringly available to Supply Chain professionals but that too few are realizing.
Our electronics industry is unique in three attributes, all because of the overarching power of a deflationary IC. New gadgets are devised daily and new categories are being created every quarter (GPSs, Tablets, Wearables). Can you think of the last new category of musical instrument, bicycle or watercraft? Think of the incredible permutations and combinations of unique components (mix) that go into one of these gadgets and contrast that to a house, car or garment.
Consider society’s ability to consume an enormous amount of these new gadgets within an incredibly short period of time. I challenge you to think of another industry that even comes close to the rate of adopting new products. Across all three of these attributes there is no other industry that is remotely analogous. These attributes equal rapid change. Rapid change that is inescapable and is obsoleting entire product categories. Rapid change also means that some industry participants are winning while others are losing. For this single reason alone, benchmarking becomes an imperative diagnostic.
From a Purchasing/Supply Chain vantage point, it isn’t too much of a stretch to say that, of all industries, Electronics is the one in which you most need to price benchmark your material cost.
Commodity traders/buyers involved in other commodities like oil, lumber and steel for instance, have become increasingly sophisticated in leveraging the best data available (big data analytics) to profit on small price fluctuations driven by supply and demand. In electronics, enabled by the predictably deflationary IC, companies redesign for higher integration and price reduction. The question supply chain managers have to ask is whether they’re leveraging this deflationary IC – between design cycles – as a source for ongoing and repeatable cost savings.
The harsh taskmaster known as short product lifecycle leaves all companies to do their best within shorter time intervals. Gathering market intelligence on pricing prior to negotiations is just one function where there is never enough time. Enter Lytica’s Freebenchmarking.com price benchmarking methodology.
Some of the best and most forward thinking electronic companies regularly use Lytica’s proven benchmarking methodology, to benchmark their current purchasing effectiveness by commodity (for the same basket of goods). As a key stage in their annual price negotiations and for quarterly business reviews, our Freebenchmarking.com tool quantifies a baseline by commodity category, identifies devices where they’re being “unfairly priced” and provides appropriate price targets. All this in nearly real-time (typically in one business week).
Clients appreciate that reports are in their lingo (e.g. CPNs, Commodity Designations, AVL), accommodate currency and geography and that Lytica is independent of suppliers. Our free BENCHMARK report allows clients to scope out potential savings prior to adopting the process. So far, in 2015, predicted client ROI for our Freebenchmarking.com Gold Report is well over 500.
Is your company operating with the same status quo negotiation strategy? Are your industry competitors benchmarking their component pricing – perhaps from recognition of the deflationary nature of the IC?
If either is true – continue on the status quo at your own risk.
Mark Tayles is the President of Lytica Inc., a provider of supply chain and pricing analytics tools to the global electronics manufacturing industry.