When I conceived of Spend Benchmark, I believed that profiling material’s spending against real market prices would be a valuable metric for companies buying electronic components. When we added the ability to identify and quantify actionable savings at the component level, this metric transformed into an invaluable tool for cost management. That was our belief.
Over the years we have seen our tool applied across all market segments and, like all tools, the results are best in the hands of craftsmen.
As we venture further into data science with AI and big data, we have been analysing our customers’ price and spend performance against the market. The results are somewhat varied. Along with this, we have been looking at relative performance across market verticals and through time which has provided us with some surprising observations. As Electronics Manufacturing Services (EMS) is our largest customer segment, the remainder of this blog will focus on their results.
All customers using our predictive analytic products – Price Estimator and Spend Benchmark – get initial savings, but the long-term results vary widely. It seems like the proficiency of the craftsman plays a significant role. Those who have embedded our methodology into their workflow and practices perform much better than those using our tools as barometers. Its not size or reputation that gets results, it appears to be focus and work practices. The companies yielding the best results are data driven and approach procurement using much of the same thinking and techniques used by high performance factory operations deploying Lean, Six Sigma and the related approaches first used in Japan. Its like the variation in product quality that emerged when early Lean adopters pulled ahead of slower-moving competitors.
While Lytica’s competitiveness metric is one layer of abstraction from price, it enables pricing performance comparisons from part to part within a commodity and across them. This normalization makes performance characterization and comparisons both meaningful and possible.
Figure 1 is a plot of the overall competitiveness level by EMS of all recent electronic component purchases made by our EMS customers. Our licensing agreement stipulates that we never reveal who our clients are, and they are not revealed here; only background information was used for this illustration. I plotted the curve arranging the data so that the company with the least competitive index score is on the left. Companies are positioned by increasing scores resulting in the company with the highest score is on the right. With Lytica’s competitiveness index, a higher value represents a lower price. There is a gold star on this curve that I will talk about later.
When I look at this plot and reflect on conversations with customers, three regions stand out. I have highlighted these regions in Figure 2 as Area A, Area B and Area C. Each area represents a space with common levels of performance when similar practices are at play within each region.
The companies in Area C have tight management of their purchasing process and excellent negotiating skills. Their results show less variation in pricing across factory locations and lower prices overall. Those in Area B are getting good results but, amongst other things, have issues with their data collection and quality across geographies and sometimes less effective negotiation approaches. Area A is the area with most opportunity and would benefit most from the adoption of methods and standards applied in Area C. I should point out that Area C companies are the most active users of our tools and have the greatest number of Price Estimator license seats.
Figure 3 ties back to the star which was introduced in figures 1 & 2. The stars in figure 3 show the position of the EMS company with the best Competitiveness Index Score in Area C at time of writing and where they were when they started working with Lytica a few years ago. Their performance trajectory is truly exceptional. While trend performance is the subject of a later blog, this company did not start out differentiated in price competitiveness in any way. Their rise in performance tracks their change in business practices tied to data driven benchmarks, mastery of negotiation and corporate culture.
This is a company to be admired as they have focused on creating customer value while eliminating waste. The results show not only in their competitiveness and price consistency across factories but in their overall company growth and financial performance. This is a company with great leadership and a strong culture of pursuing excellence in all they do as evidenced by the evolution of their material procurement group.
Culture, mastery and data were the keynotes of the quality movement, and these three things raise their head again in purchasing. Lytica is investigating these factors and the associated best work practices so that we can assist our customers in getting the best results from Lytica’s products. The spectacular performance of our “Star Customer” can be replicated; migration from Area A to Area C is possible!
Ken Bradley is the Chairman/CTO & founder of Lytica Inc., a provider of supply chain analytics tools.
