How much should one pay for a chip or a component? Lytica, a Canadian supply-chain pricing analytics company, has the answer. Founded by former Nortel chief procurement officer Ken Bradley, who, like many others in the IT industry, was once bemused by component pricing, Lytica is transforming itself into a software-as-a-service (SaaS) company, helping OEM and EMS make well-informed deals when buying or selling.
Digitimes recently had a talk with Bradley about the value that business intelligence, such as pricing information and well-thought-out planning, can bring to a company.
Q: I guess many OEMs have used Lytica's services when deciding what components to use. What inspired you to create this company that offers such a unique service?
A: I spent many years at Nortel Networks, managed to negotiate for some joint ventures for Nortel in Guangdong province in China and in Shanghai, and founded Lytica after I retired from Nortel. My background was semiconductor physics and developing components. After I helped Nortel set up some joint ventures in China, they made me chief procurement officer. I was brand-new in purchasing, leading 1,600 people around the world, doing buying, sourcing, negotiating, and component engineering. What I discovered was that nobody knew how much I should be paying for a component.
At the time Nortel was growing really quickly. I think we had the largest market capitalization in the world at that time. My suppliers and my staff told me I had the best pricing in the world. I sent a circuit card, with all the components on it, to suppliers, or EMS, like Flextronics or Sanmina, and I would get back a card with prices for its materials and components. Many of those prices were cheaper than I was paying! So I asked my staff: "Yesterday you told me I had the best pricing in the world! How did this happen?" They would not know. It turns out no body knows. Pricing is a private and secret kind of thing. It is not necessarily confidential, but nobody would share their pricing because they think it is their strategic advantage. This really bothered me. I even went to good consulting firms. But after charging me like US$100,000, they would tell me, "Ken you got really good prices." They didn't know, either.
When I retired, I formed Lytica in 2005 as a consulting company. Because we are not suppliers, I got to see what people paid for components. I thought: Wouldn't that be great if we can set up a new product line in Lytica? We can gather all the prices from companies that we dealt with. They would share their pricing, and Lytica could statistically analyze where each price fits in the ranking of each component.
Q: What was your methodology?
A: The idea is to tell how good somebody's spending on electronic components is compared to market. Lytica predicts when something doesn't seem to fit. For example, one company's prices on a component may rank the 10th position most of the time, but for specific parts and components they ranked at the 30th. Lytica would advise them to negotiate prices consistent with the 10th position for those specific parts and components. And 80% of the time they would get prices close to what we suggested. So, the method has proven to work.
Lytica founded this service because everybody is having the same problem of not knowing how much they should pay for the same component. People think they have good pricing just like I did while I was at Nortel, but there is always opportunity.
Lytica started doing this, and the database grew bigger and bigger to be the largest in the world of this type. So we hired more staff and came up with different ways of doing the modelling. The reality is, our model is based on the prices people are actually paying, and not by crawling on the web. We formed statistical distribution diagrams, knowing all the prices of the same components used by all companies in Lytica's database. When you come back with a price from a supplier, we can see where you fit in the ranking of that component's distribution, and if it's an outlier in your basket of components, Lytica recommends a price appropriate for you to renegotiate.
Q: But there are so many factors that can influence the price.
A: Yes. There are big companies and small companies. There are companies which are good negotiators, and those that are poor negotiators. Or those which have great business processes versus those that have not. And high volumes and low volumes. We counted some 60 factors that can influence the price, including freight, volume, channel mark-up, payment-terms, commodity spend and not so obvious factors such as financial risk, inventory reservation levels and geography, etc.
There is no way you can come up with an equation for people to do something like price analysis. It is easier to calculate the cost, but that is not true for price. Market demand, negotiating skills, tariffs… you can list all of the things that would affect price. But it turns out cost has no correlation with price. You cannot figure out the price with all those 60 factors, either. Take weather for example, people have not come up with a perfect way to predict weather which needs fewer variables. So it is impossible to try using a bottom-up way of calculating the price. By characterizing how you perform in a marketplace Lytica takes it into account all of the things that you do such as being a skilled negotiator, having a good business practices, and all those other things you do. This characterization use statistical distributions to analyze what you're buying.
All a customer needs to do is to give us their list of component pricings using a template. They can achieve great savings because we identify components that, for some reason, the prices are not normal for them. Our clients love this because that saves them time and money.
Let me give you an example from the Nortel days. We were purchasing a strip of special metal which is about an inch wide and six inch long. Our development price from the supplier was US$1,100. When it went into production, nobody changed the price. Nortel was buying thousands and thousands of these things at the price which was supposed to be for new product introduction. Lytica is able to find those problems right away.
Q: How can component and parts manufacturers in Taiwan or EMS companies make Lytica their tool to improve their operations?
A: We started with many OEMs as customers because we didn't think the contract manufacturers would like our service as they're selling parts. But EMS do a lot of buying for the OEMs. Now EMS people come to Lytica, saying, "You've got to help us." Their customers demanded a lower price for components because they feel they are paying too much, but EMS have both sides of the equation. They have both the buy side and sell side problems. They were not always getting the best prices themselves. They now are using Lytica to test their prices and make sure they are not charging too much to their customers. So for EMS, they have advantage on both sides using Lytica.
Lytica has more OEM customers than EMS. But EMS is the largest single market segment that we have, representing 30-35% of our businesses. Our smallest customer has US$5 million in sales a year, and the largest is among the largest corporations in the Fortune 500 or Global 2000 list. In terms of verticals, we've got customers from computer, automotive, medical, Internet of Things (IoT), etc. We are well-represented on the high end, and our goal is to capture the other 180,000 companies out there using electronic components.
Q: Are any of those customers from Asia?
A: Most of our customers are US and European companies. Some of the computer companies are from Asia. Some are from Taiwan. Pretty much every customer we have sources somewhere from Asia or the rest of the world. It is hard to get electronic components not associated with China, Taiwan, Malaysia, Vietnam and Singapore.
Q: How big is your team? Do you have offices in Asia?
A: There are 25 people in the company and growing rapidly, and are all located in Ottawa, Canada. If we wanted to set up offices in Asia, Shenzhen, Taiwan and Shanghai would be great places to do that.
Lytica uses technologies so that we don't need to have remote offices everywhere. One of the things we need to have in order to do this job properly, is to have information on componentry. Some companies have offices set up in India or China, with 300 people to do component engineering and manage data information. Lytica does this using artificial intelligence technology. Around 80% of our people have technical degrees, such as science and engineering, mathematics. Lytica has PhDs who've worked with technology and research organizations. We've got a good mix of older people with production and distribution experiences, and young people with skills in AI and data analytics. Our employees speak 18 different languages. The diversity of the company forced us to venture on solutions in different ways than the ones currently adopted in the market.
What we've done with technology is to read documents and organize information by use of machines. We do very sophisticated modelling. That really cuts down on our need to have a lot of people doing those tasks. On the sales front we're growing fast. We have transitioned from being a traditional consulting company into a world class software-as-a-service (SaaS) platform company.
Lytica is expanding our global presence with marketing and sales initiatives. Asia is an important area of focus and we're bringing in a lot of business leads from there. The majority of our leads come from Asia, Europe, and the US. Our customer profile looks like an inverted pyramid. Most of our customers are huge companies with revenues over US$5 billion a year, and some of them are in the world's largest market cap group. We've got a very good position, because we receive a lot of quality data from those customers, and the opportunity to grow with these data. As the roadmap goes forward, we are able to increase our capabilities and help them get better pricing and improve their processes.
The data that our customers give us are confidential, and we do not disclose customers' names. Some customers would mention that they use our service, and some would not.
Q: Efficiency seemed to be the golden rule before Covid-19. However, the pandemic sems to have shifted the attention towards supply chain resilience and risk diversification. How has the pandemic affected your business?
A: When Covid hit, everybody tightened up, because nobody knew what the impact's going to be and how long to last. We saw our sales go down, and customers delayed spending. There was this six-month period that nobody knew what's going to happen. In the last three or four months, all of our customers have started buying again, and we got new customers at a tremendous rate as we changed to a SaaS model. We actually are having our third record quarters in a row.
Your comment about efficiency is interesting. I think efficiency is still the golden rule. Companies still need efficiency, but the problem is, they're not quantifying risk adequately. As they have been hit with risk from a couple of sources - one is the pandemic, one is the trade tension, one is the semiconductor shortage - so they are demanding diversity and resilience. From my perspective, resilience is a result of well-thought-out processes. So the companies that are succeeding are the ones with the most solid practices. Many times, I see a company having to pay more, it is because they did not forecast well enough to be able to ensure the supply they needed. Or they did not have adequate thinking into their sourcing strategy. When you are good at business intelligence and planning, you are in better shape. When the world was short of capacitors in 2018, we saw some companies which were getting solid pricing and supplies. They were the ones with the best planning systems. Other companies which have "I will be able to negotiate when I need it" mindsets were paying prices that are 2-3-4 times than they should in premiums just to get components. It is the practices that are the root cause that drive diversity and resilience. Companies need to have appreciations for diversity and use Lytica's SaaS platform.
Lytica chairman Ken Bradley