According to a recent news report for DigiTimes, Intel will cut prices of its CPUs by 20%, not long after deciding to raise those prices in Q4 2022. This is an eye-opening example of volatility and how market pricing keeps shifting in these uncertain times.
In the past, inflation was low, and price predictability was generally assumed. Then the pandemic came and changed everything. Generalized component price stability gave way to price volatility, leading to a new “reset,” where everyone needed to reestablish market pricing.
This begs the question: What price should you be paying for your components?
For components where your price has increased by up to 50% in the last two years, is that still the right price now? This can be difficult to determine, especially with softer demand resulting in excess market supply in many cases. It’s clear you can’t rely on outdated past savings models to determine current or future pricing. With so much instability, you have to completely redefine the pricing process.
A traditional way many companies target cost reductions is by looking at past savings on a component or component/commodity grouping level and applying that trend to those same components as they plan for the future. However, what trends do you use if the pricing of your parts increased by 50% over the past two years? Do you “forget” the past two years and go back to pre-pandemic price trends? If so, do those trends reflect the current reality, especially if your prices are now significantly higher than two years ago? How do you know if those component prices, in a slowing economic environment, might drop significantly this year, such that pre-pandemic trends are invalid? This outdated, generalized approach to price target setting misses a significant opportunity to proactively identify current market-based cost trends.
So, what can be done? Now more than ever, companies need a real-time pricing platform. A solution that includes data points like current distributor pricing, will more quickly reflect market inventory and pricing adjustments, enabling procurement professionals to track and achieve prices without getting left behind with pricing from the past. This will provide a new level of intelligence by building on the data in your company, along with additional third-party insights you normally wouldn’t have access to.
The most advanced pricing platforms can take your bill of materials and immediately identify parts where there are specific savings opportunities. They can show you where pricing isn’t as aggressive as it should be, so you can go back to your suppliers with a more targeted approach. Instead of only pushing for a flat percent savings across many components, you can use specific insights on many parts to drive a real-time target with your suppliers that likely can give you more savings than if you simply relied on the old model of using generalized history.
Ultimately, real-time pricing platforms help change the game for commodity managers, who may not have had the data to back up their negotiations with suppliers in the past. Instead of asking suppliers to “just do better,” you can now say, “I know you can do better, and here are the specific components where you can improve your pricing.”
Finally, real-time pricing solutions are more essential than ever before because not all components have the same market dynamics, which is exacerbated by the more recent supply chain disruptions. Although the worst of COVID-19 may be behind us, supply chains remain risk-prone, and price inflation is still endemic. As Accenture explains, “Inflation and other disruptions have continued to challenge supply chains, and analysis shows there is an even stronger correlation now between supply chain disruptions and inflation than before the pandemic.”
Across the globe, businesses are realizing traditional procurement tools do not possess the capabilities needed to address this new paradigm. An alternative approach is emerging. Real-time pricing platforms can reveal new opportunities to reduce or avoid costs and mitigate risk. You can’t afford to wait for inflation to pass or the market to become more stable. The time to act is now.