Market Price Normalization Improves CompetitivenessKen Bradley
When we assess a new client’s spending against market pricing, we usually see a distribution of prices made up of overlapping distributions. The profile suggests three distributions. The first is a fairly tight distribution of good pricing positioned where half of the distribution is seen to the right of the mode value (peak with small sigma). The second is a more sizeable distribution with half of it appearing to the left of the mode. Finally, the third is a somewhat random scattering of poorly priced parts (outliers).
A typical example looks like the Competitiveness Profile illustration below.
By normalizing pricing through a market based calculation, patterns of opportunity emerge. Normalization uses real prices paid by actual clients. While each profile is unique to the client, they all exhibit the 3 distribution shapes to some degree. What’s interesting is how quickly clients act to remove the outliers and begin tightening the more sizeable distribution when the opportunity is presented. Knowledge enables actions that get results! Knowing which components are mispriced and what you should pay for them is a great enabler.
Most operations professionals believe in data and act on it; schooling in lean manufacturing, Six Sigma or the philosophy of Dr. Deming have made this their standard operating approach. Expectedly, it’s not surprising that when they see their data normalized, they act with conviction. What has changed for most OEMs and EMS clients is seeing their data in market terms. Once engaged, they are converts and zealous users of this approach to negotiation and cost reduction.
Although not as revolutionary as the invention of the lens that allowed us to see the stars or its use in a microscope to enable study of previously unseen and unknown microbes, our competitiveness quantification brings sharp focus to pricing and reveals the unexpected and unforeseen.
One may feel that this market view technology is great for component buyers but positions suppliers at a disadvantage. This is not true as this is a win-win approach for all. If we reconstruct the competitiveness profile from a supplier’s viewpoint, it would look something like the Competitiveness Profile (Supplier View) illustration below.
As more OEMs and EMS adopt market price benchmarking, the following happens:
- Outliers in the pricing profile disappear
- Suppliers who quote with high prices or low competitiveness relative to the customer’s performance lose bids. This wastes the suppliers time and the customer’s time. This is the blue section of the illustration.
- Suppliers who quote in the grey section of the distribution are giving away too much margin as they price unnecessarily low.
- Suppliers who quote in the orange range will have a high win-loss ratio on quotes and best margins.
Suppliers understand their pricing as it pertains to their product but are often at a loss to understand market pricing when competitors make equivalent components. As a result they make costly mistakes in the blue and grey regions. Furthermore, suppliers are often presented with customer demands for pricing that appear unrealistically low. They are at a loss to know if they should invest effort to quote or if the client’s requested price is a bluff. Market price benchmarking holds the answer. One of our supplier clients uses market price benchmarking to separate bluffs from real opportunities.
Times have changed and the early adopters of market price characterization are pulling ahead of competitors that have been slow to act or are unaware. Most clients are surprised at how easy it is to improve their competitiveness through market price normalization.