A friend of mine recently bought a product in France, and I purchased the same item in the United States for a significantly higher price.
At the time, I wondered how the same product from an identical brand could have a fluctuating value across currencies — especially when the Euro is typically more and the US Dollar is less. But now I understand that the shifted exchange rate hadn’t captured yet, and that this same situation can be represented within the B2B space.
Global pricing is a frequently faced concern of companies involved in an international capacity, and there are often more intricacies than initially imagined. When contract terms and business operations are at stake, global pricing and relative agreements become a debate about what costs are factored into prices within varying geographies and why these costs aren’t weighted equally across the board. What many fail to realize is that fairly obvious causes such as distribution expenses and differing labor rates aren’t the only considerations to blame.
“The location with the lowest labor costs doesn’t always enjoy the lowest relative costs for these other location-dependent elements, which is why re-shoring [a.k.a. nearshoring], or the practice of moving manufacturing out of these lowest-labor-cost areas back to the Americas, is happening," Michael Knight of Global Purchasing points out. "Any component manufacturer with global operations can probably talk specifically about the differences between their plants.”
Say you’re a part of a purchasing department placing an order for 10,000 components. Given your high-volume order, your department will receive a lower price per unit. This is hard dollars saved for organizations that don’t require more customized materials. For less-standardized and more-catered parts, there are fewer customers seeking the exact accommodations and there are engineering costs to those specifications.
Another often-overlooked cost is the intercompany transfer pricing structure manufacturers involve when transporting goods. You’d think that materials would move from one region to another at the same rate they did when they were originally produced; however, this is usually never the case. Knight clarifies that “things like taxes, duties, freight (air versus ocean), and cost accounting rules all factor in.”
“For example, parts made in Japan by Japanese component manufacturers are usually sold to their overseas operations, as the manufacturing site is run as a profit center. The selling organization is buying the parts from the plant at an uplift, and then, in effect, reselling them, after applying another uplift as they, too, are a profit center. The solution would seem to be to buy parts directly from the manufacturing site, which some customers are exploring, but that too has many less-than-obvious factors to be considered.”
Current market conditions also shape prices differently in diverse areas. When the market is slow and supply exceeds demand, suppliers often will sell higher volumes at a lower price to cover their fixed costs and gain some dollar contribution per unit when analyzing operating leverage. As a tactic I remember well from Managerial Accounting, this method of prepping for a change of pace during a slow time allows a company to gain market share when (if) the market recovers.
This strategy has become a go-to over the past few years, which explains why there is a good deal of conversation around price declines noted. One interesting portion of this analysis is that there is no consistent metric of price changes globally. Sure, if there is a widespread famine and a CPG organization is losing out on their main ingredient, it’s very probable that this is the direct cause. However, without a recognized event as the cause for a price drop/boost, there are often internal factors that can be attributable for the adjustment.
Since these adjustments are often cost accounting and/or long-term planning provisions, it is worthwhile to pursue these conversations with suppliers — especially in a global environment where regulatory and tariff costs become a consideration in pricing.