Market Watch

How did they miss the boat? Bereft of essential pricing information, the firms lacked badly needed visibility for seeing into the often-murky depths of the semiconductor supply chain, a tightly wrought space so fraught with complexity and tangled ecosystems that a shortfall in one area—prices, for instance—is sufficient to create unexpected havoc.

These are the kinds of questions, however, most confidently undertaken and addressed by the IHS iSuppli Component Price Tracker (CPT) tool, launched to develop and standardize methods for uniform application to a range of strategic, commodity-type components. In a significant upgrade, CPT will be available starting January 1 via TRAX, an innovative analytical tool that lets clients create custom views and drill down into the data in a fraction of the time it takes to manipulate static Excel files.

The timing for CPT on TRAX can hardly be better. If strategic procurement organizations charged with obtaining critical semiconductor components can remember one thing, it’s that the semiconductor industry is highly cyclical. As such, the suppliers with which the industry deals and negotiates pricing on a daily basis face constant boom-and-bust cycles related to demand for their products.

Demand, however, is fickle and unpredictable. During good times, companies like Intel Corp. and Texas Instruments Inc. can’t seem to produce products quickly enough in order to meet demand. But when times are tough, demand inevitably slows, leaving suppliers exposed and vulnerable.

And ripple effects are devastating: Slow PC sales, for instance, can send entire segments of the semiconductor industry into a tailspin—affecting vital participants and associated players such as those in dynamic random access memory (DRAM) or the solid state and hard disk drive storage areas.

For supply chain professionals, CPT serves as a critical procurement tool to help navigate the intricate semiconductor landscape, offering up vital insights on pricing and its significant relationship to other industry drivers such as supply, market share, device applications and semiconductor fab capacity.

How CPT Helps
In late 2009 and early 2010, many companies that had Power MOSFETs designed into their end products faced significant price increases and availability shortfalls for some of  their most profitable goods. Because inventory had been cut so deeply, an uptick in demand as the economy slowly revived created a whirlwind of severe shortages, in the process driving average selling prices well above normal levels.

To assure the continued supply of Power MOSFETs—a type of metal-oxide semiconductor transistor designed to handle significant levels of power—as well as to protect their profits, companies resorted to drastic measures. Some ventured outside the authorized supply chain network, procuring product from so-called grey market brokers and dealers, and ended up exposing their own companies to quality and reliability issues from counterfeit items plaguing the market. Others opted to enter into binding, restrictive contracts with suppliers—the move itself in stark defiance of the prevailing wisdom on prudent component pricing management.

In one such scenario, the IHS iSuppli CPT tool proved instrumental in revealing the disparity between what a firm had mistakenly thought was its negotiated low price, compared to an even lower price supported by the market as determined by CPT. The former showed a customer-negotiated drop in price of  11 percent; CPT, however, showed the unsuspecting customer that prices had plunged by an even steeper 26 percent.

CPT can help companies consider the following before they enter into any risky long-term commitments associated with strategic procurement: