Back to the future

Motorola's decision to keep its component pricing to itself signals that the supply chain is returning to more-traditional business practices, market watchers say.

Before the rise of outsourcing, OEMs and their component suppliers negotiated confidential preferred pricing agreements based on volume purchases or other terms. But as OEMs outsourced more of their manufacturing and component procurement to contract manufacturers, the CMs became privy to these agreements. Contract manufacturers would then use that information to negotiate, with the same suppliers, additional volume discounts. Knowing what its OEM customer pays gives a CM additional leverage for driving prices down.

However, Motorola's senior vice president and chief procurement officer, Theresa Metty, recently told an industry gathering that the electronics giant was tired of giving the industry the advantage of knowing its preferred pricing and will now "mask" its pricing from contract manufacturers. "In the outsourced world, the normal procurement process is disrupted by a third party," she says, adding that maintaining the supplier/OEM link is vital. OEMs and distributors, not contract manufacturers, design components into products.

If an OEM is distanced from a supplier, the OEM might not get the benefit of a shared technology road map, early adoption of new technology or the ability to maintain a competitive pricing advantage, Metty says. A contract manufacturer armed with Motorola's pricing could negotiate a procurement deal that could ultimately benefit a Motorola competitor.

Masking will keep confidential the prices Motorola pays its suppliers. "I think some CM companies may be disappointed to hear the news, because it's easier to set a competitive price if you know the price already negotiated by the OEM," says Pamela Gordon, president of Technology Forecasters, a CM consultancy. (CMs contacted for this story did not respond by press time.) "I think it's good for competition and the industry as a whole—it brings the process more toward traditional bidding." It will also force CMs to compete in terms of their manufacturing efficiencies—not on their procurement margins they make on procurement, Metty says.

Suppliers, Gordon adds, may see masking as a remedy to the problem of having to negotiate terms with an OEM, only to negotiate with a CM over the same job. It may also help reestablish trust that has lately been lacking in supply chain relationships because the current bidding structure causes stress between OEMs and CMs, and CMs and suppliers. "Maybe there is an opportunity for a healthier supply chain that collaborates more than what we have today," says Craig Conrad, senior vice president of global sales and marketing for distributor TTI. "In general, nobody trusts anybody anymore."

Metty sees masking as a way to stabilize pricing, and Ken Stanvick, senior vice president of the consultancy Design Chain Associates, agrees, saying, "I think it's a move that's long overdue. For a long time, people have been taking advantage of suppliers." In the current buyer's market, anybody offering up a hunk of business can name the price and terms. When the tables turn, says Stanvick, "it's important for suppliers to understand who their customers are."

Analysts and industry players alike wonder whether other OEMs will follow suit. "It would be courageous to take that step," says Gordon. Stanvick says other OEMs may wait until the program is proven. "Motorola has a lot of nuts and bolts to work out," he says. But it wouldn't be the first time Motorola has set the pace for the industry. In the late 1980s, the company challenged all its business partners to reach six-sigma quality levels or risk losing Motorola's business. For all the electronics industry's problems, substandard quality hasn't been one of them for a long time.