Global pricing is a frequent discussion topic with many customers who have global operations, and even with some who are confined to only one region of the world but are hunting for the lowest component acquisition cost in the world.
The discussion starts after a request for global pricing runs into a brick wall with component manufacturers and distributors. It is a perfectly logical request to which a negative answer, on the surface, seems perfectly illogical.
To start with, what a customer is asking for when they request a global price is the lowest price at which that component is sold for in the world. Behind that is the implied realization that the manufacturing cost for that component, should it be manufactured in multiple geographies, is likely to be different at each site. Often, parts made in low-cost regions in Asia are assumed to have the lowest manufacturing cost, so what customers frequently are asking for is the Asia price for their out-of-Asia production requirements. This is actually a good starting point for the discussion, as it acknowledges right up front that price is a function of cost. With that in mind, what the conversation quickly turns into is one about the realities of “cost.”
Just as price is a function of cost, a component cost is itself a function of other things, starting with the already mentioned manufacturing location. The obvious factor in this is differences in labor costs. Less obvious is differences in utility costs, currency conversion, regulatory costs, labor skill, and transportation costs. The location with the lowest labor costs doesn’t always enjoy the lowest relative costs for these other location-dependent elements, which is why re-shoring, or the practice of moving manufacturing out of these lowest-labor-cost areas back to the Americas, is happening. Any component manufacturer with global operations can probably talk specifically about the differences between their plants. And what all of us are experiencing first-hand is the growing impact of rising freight costs, which is a worthy stand-alone topic, so I’ll save that one for later.
Another element of cost is volume. The higher the volume a component is manufactured in, the lower the piece price. One of the advantages of the Internet is that it allows an engineer to search for and find a component with all of the ideal attributes he or she wants. The disadvantage is that the more ideal the part the engineer selects, the more chance there is that it is only going to be used by a very small group of customers. In fact, in our business the number of parts we sell that are completely unique to just one customer is much higher than one would think, given the high percentage of passive components we sell. This engineering decision can have a big impact on cost, and that too is a worthwhile topic that warrants additional attention at a later date.
The cost of raw materials, and the volumes in which they themselves are purchased, is the third major element of a component cost. The acquisition cost of a given raw material often fluctuates around the world as a function of labor and transportation costs at the site where the material is mined and/or produced. While it is true there are global commodity indexes for raw materials, what they are reflecting are price averages and they do not factor in distribution costs. This is another frequent topic of conversation with customers who believe that the price paid for a finished component should perfectly track that of the price indexes for the raw materials that go into that component. Yes, we’veVolumetric Efficiency discovered a topic for yet another follow-on article.
