"Your margin is too high"
By Staff -- Purchasing, 10/18/2007 6:00:00 AM
Among the possibilities: continue to pay the high margin; change distributors; insist on more support from the distributor. What would you have done? See purchasing.com/negotiations for the solution.
An electronics manufacturer was procuring $25 million annually in semiconductor components. A sizeable portion of this spend was for an FPGA (field programmable gate array) product. The electronics manufacturer relied heavily on component distributors. But after some research, the manufacturer's procurement staff learned that due to an industry practice known as "registration incentive," they were paying a much higher price relative to the distributor's actual costs than they felt was reasonable. The manufacturer asked for a lower price. The distributor refused.
Problem: Registration incentive is the key program OEMs use to encourage distributors to invest time and resources in earning new business. The OEM charges the distributor less than the normal price for the components, so the latter makes more money. In this case, the distributor was making a 28% margin. But the electronics manufacturer said the distributor wasn't doing anything significant to gain its business. Additionally, the lower component basis the distributor was enjoying made it impossible for other distributors to compete for the business.
Solution: The electronics manufacturer was in the process of awarding new significant/strategic business to the FPGA OEM for key next generation technology. The electronics manufacturer used this new business as leverage to convince the FPGA OEM to transfer the (very) favorable registration cost basis to a different distributor (who had not technically “earned” the registration incentive). Then the electronics manufacturer negotiated a “cost basis plus” agreement with the new distributor. The annualized negotiated savings amounted to approximately $500,000 (and has grown significantly since then due to the electronics manufacturer’s FPGA consumption growth).
Note: Since this negotiation, component OEMs have re-assessed distributor value-add. This has resulted in a reduced registration incentive margin structure for distributors. Distributor registration margins are now at a level that is more commensurate with the supply management value-add provided to their customers.
Are you a black belt negotiator? Tell us about one of your negotiation successes, and we'll print it so others can learn from your experience. Send it to pteague@reedbusiness.com.
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