Baseball, metals, and the price of electronics

By Lisa Reisman A fellow once told me that a ticket scalper makes more money the further away he is from the game venue. The logic is that the buyer doesn't know the daily market price for a ticket because nobody else has accosted that buyer advertising the price of a ticket. And so, if the buyer is trying to get a seat for a 2007 late season Cubs game, he may just buy the first ticket that comes his way because he doesn't want to risk not getting a ticket. Subsequently, he likely overpays for that ticket. The lesson is this - the closer you are to the source of information, the greater likelihood of not overpaying. And what does scalping baseball tickets have to do with today's electronics industry? The closer your operations / purchasing organization is to the underlying commodity or raw material trends, the greater likelihood of not overpaying. Of course it also helps to have a good seat (this is akin to having a bag of sourcing strategies at one's disposal). But what we are really driving toward is using some of this underlying information to better negotiate with suppliers. Let's take for example, metals. A full range of metals are used throughout the electronics industry. From the aluminum used in fans for Intel processors (extruded alloy material) to titanium used for stereophones and high-end laptop chassis, the underlying metals can greatly affect the price one pays for components and assemblies. In March of this year, it was reported that China, the largest producer of tin, may reduce exports by 10%. Tin is needed to solder electronic components. What types of strategies could an electronics manufacturing services (EMS) provider or OEM deploy to mitigate this potential price increase? One effective strategy (if deployed in a timely fashion) may involve locking up tin supplies in a long-term contract just prior to, or around, the time of this announcement. But without knowing the underlying information, a company will likely have been hit with tin price increases. Additionally, also earlier this year, copper; lead and silver each increased in price which negatively impacted savings for items such as wire harnesses or connectors. But copper futures are now sliding due to housing worries and credit problems in the United States. From a sourcing standpoint, this implies that for companies who held off sourcing these types of products in Q207, it may soon be a good time to think about re-sourcing these categories. The following chart shows the trend line for copper: The most recent copper spot chart can be found here. In general, base metals have come down to where they were 12 months ago. This means that any company that has seen a price increase throughout the course of this year due to base metal price increases, may be able to re-negotiate or take back some of these margin points. Nickel is down by nearly 50% from the beginning of 2007. Monitoring these trends can allow companies to re-negotiate pricing for capacitors. So, if tracking underlying pricing information is a key to not overpaying, what other tools does the electronics operating executive have at his disposal? Again, by getting a little closer to the information and asking suppliers to split the material (commodity or raw material content) from the value-add portion of the cost, electronics companies can competitively bid out various electronic components. Furthermore, they can tie contracts to published indexes. But there is more. From a cost avoidance standpoint, smart companies need not merely accept price increases from suppliers. Instead, with greater information in hand around material costs vs. value-add, buyers can more effectively negotiate price increases to be applied to the material portion of the content only (as opposed to an increase across the entire unit price) So, what information should electronics companies pay attention to with regard to some of these metals categories? The data appears to be telling a conflicting story. Purchasing's October Business Conditions Survey shows the manufacturing index at 53.5 nationally (50 signifies growth). Though the national average suggests growth, the mid-west (a bell-weather of industrial manufacturing) is down. However, despite slowing growth in the United States, China demand remains strong. But supply and demand may not tell the entire story. The double whammy of a cut in US interest rates plus a weaker dollar will likely push up oil, gold and other base metals. How will these trends impact the electronics industry? It may be too early to tell but, if the right information is gathered, executives can begin to ask these questions of their operations group:

• How do we track underlying commodities for the key purchases that we make (e.g. copper for our printed circuit boards?)
• Do we deploy price escalator / de-escalator clauses to take advantage of cost savings when prices decline?
• For key purchases that we do make, do we regularly and competitively bid out the value-add portion while tracking the material portion to an index?

Clearly, asking the right questions can help unearth the information you need to make the best possible decisions. And that's because when it comes to smart sourcing strategies in markets where volatility is the norm, knowledge is power. This goes for baseball - and it also goes for the electronics and metals markets. Lisa Reisman is Managing Director at Aptium Global, www.aptiumglobal.com, a direct materials sourcing and supply chain advisory firm. E-mail: lreisman@aptiumglobal.com.