Geoff -
Let me try and explain the difference by example:
Compaq provides a contract looking ahead on a rolling 6 month basis which says 'we'll take x00,000 of processor A in Sept at a price of $xx.xx, y00,000 of processor B at a price of $yy.yy' etc. 'with delivery as follows: x0,000 on sept 10, x00,000 on sept 17...'. CPQ can change delivery schedule for products that are more than 30 days out, but must take the overall contract amount by quarter or suffer cancellation charges. Intel provides a mechanism something like price protection for the 30 day window, which protects CPQ from a shift in product cost for parts in the pipeline (otherwise CPQ would have an incentive to shift delivery around anticipated price change points)
Dell, on the other hand, says 'we'll take at least x00,000 of processor A and y00,000 of processor B next quarter. But we don't know exactly what the run rate will be on any given day, so we want you to have an adequate supply of parts on hand to meet production needs which will be a minimum of x,000 per day and a maximum of y,000 per day. The price we pay will be the current price at the time the parts come off of the truck, which will be only hours ahead of production. In addition to this daily variability, we reserve the right to adjust the forecast 30 days down the road.'
So from a mfg scheduling point of view. Intel can forecast production of CPQ's parts with high confidence that CPQ will take the parts, and if they don't, Intel will be compensated via cancellation charges. With Dell, they can predict the minimum, and they know the maximum, but Dell could have a slow period where they take the minimum for weeks at a time, or they could demand the maximum for the same period. And in the meantime, Intel has to manufacture the parts at a rate which accommodates their best guess as to the average demand, and any shifts away from that average are at their expense.
It is pretty easy to see which model allows Intel to optimize their fab capability and inventory position. They also can easily calculate the cost difference between CPQ's buying pattern and Dell's. It is then straightforward to apply the cost differential to pricing policy so that each customer pays their fair share of Intel's overhead. |
