Toyota is a major player in the automotive industry, but it still sources for auto parts to manufacture its cars. Changes in the demand for Toyota’s cars affect the demand and supply decisions of the auto parts used in the company. The auto parts companies should consider the most appropriate pricing mechanisms to fit the current demand and supply needs. Therefore, the standard markup or the competitor-based pricing approaches can be applied to the auto parts industry players.
Auto Parts Size, Scope, and Competition
The auto parts category is one of the procurement product categories that the Toyota Company undertakes. In particular, the company purchases auto parts to help in the manufacture of Toyota vehicles. The auto parts industry mainly deals with the supply of parts to companies in the automobiles industry. Therefore, the sellers of auto parts are also referred to as the original equipment manufacturers (Albright 10).
This industry is inclusive of companies that both assemble and manufacture a range of motor vehicle parts and accessories, which include hybrid systems and engine exhaust, among others. Globally, the auto parts manufacturing market is estimated at 1.1 trillion dollars, with more than 15% of the total income reported to be originating from specific products of auto parts (Collins, McDonald, and Mousa 14). Tires are the largest manufacturing segment of this industry, with about 165.6 billion US dollar in revenue. The second largest sector is the seats’ sector, whose worth is approximately USD 116b. On the other hand, the components of the drive train are valued at about 112.1 billion dollars (Sustainability Accounting Standards Board 1).
The auto parts industry is highly capital intensive, meaning that companies and makers of auto parts require large sums of capital to start their business. Thus, the only way that businesses can gain a competitive advantage in this industry is through investing capital equipment (Wortham 16).
Further, the cost of purchasing the raw products used in the manufacture of the parts makes up the biggest share of the total costs spent by companies in the industry. In fact, volatility of prices for materials like steel tends to affect the overall profit margins anticipated by auto parts companies (Suthikarnnarunai 19). The second largest share of the cost is taken up by wages, which account for about 10% of the total revenue generated in the industry (Sustainability Accounting Standards Board 2).
The auto parts industry is characterized by stiff competition, where players from the West and Asia dominate the market. Examples of the players include Bridgestone and Tenneco, among others. The main specialization of the above companies is the supply of the automotive parts to large automotive companies. First, competition is high in the industry, as every company fights for the biggest market share. Every company is struggling to become a supplier of choice to each automotive company in the industry. Secondly, there is intense pressure for the OEM’s to cut down on the prices of their commodities (Holweg, Davies, and Podpolny 7). Thus, there is a need to manage labor costs and increase the sale of automobile parts in emerging countries (Rubenstein 11).
The Demand and Supply Factors that Impact on the Auto Parts Market
Some factors affect the demand for automotive parts for Toyota Company. The first issue is the number of vehicles in use. Orders for the automotive parts increase when Toyota sells many vehicles to its customers because the customers require servicing and change of parts. Moreover, the company gets the initial parts used in the making of the cars. Thus, the more vehicles that the company makes and sells, the more demand for the parts used (PR, Newswire par. 2-4).
The second factor that affects demand for the parts is the number of newly manufactured vehicles (Veloso 2). Parts are a great commodity of production that the Toyota Company has to utilize. Toyota is forced to order parts from the suppliers, given that the company is not able to afford and make these parts by itself. In effect, newly created cars require more components and parts in the manufacturing process (Sturgeon et al. 10).
The Current Pricing Mechanism Applied to the Category
Since the economic depression in 2008, there has been a decline in customer demand for auto parts across the various sectors (Wething and Scott par. 2). This change in demand has forced many auto parts players to evaluate the different ways through which they can reduce their expenditures, as well as generate new revenues. As these companies are looking for ways to lower their costs, increase their efficiency levels, and identify new opportunities in the market, an emerging area of generating more revenue through after sales services is also coming up (Sturgeon and van Biesebroeck 6). The industry players have identified that value of these aftermath sales and services is higher than that of the auto-parts core business.
Applicable Pricing Mechanisms Applied for Auto Parts
There are several pricing mechanisms that auto parts companies use in the pricing of their products. The first mechanism is the standard markup, also known as cost plus pricing mechanism. Here, prices are set using the unit variable cost, plus the unit allocation from the fixed cost, which is then multiplied by the total markup (Martins, Scarpetta, and Pilat 73). This pricing mechanism is the most popular with industrial manufacturers’, owing to the unpredictable behavior of customer demand, as well as price elasticity.
The disadvantage of using this pricing option is that the markup is applied to the parts and spare parts, irrespective of the customer’s desire to pay. For example, customers are faced with high prices of navigation in the automotive sector. In effect, little consideration to the customer’s perspective and applying a markup of about 50% means the pricing does not meet the expectations of the customer (Chappell and Sedgwick 12).
This is likely to lead to high customer dissatisfaction. Moreover, profitability is affected negatively by this mode of pricing. In certain instances, customers perceive the value of a part and are willing to pay a higher price for it. In effect, companies that apply the standard mode of cost pricing will end up charging a minimum price below what the customers are willing and able to pay, thereby leading to lower profit levels.
The second type of pricing that the industry applies is the competitor-based pricing. This model of pricing is applied by companies with the desire to adjust their prices, according to how their competitors are carrying out pricing. Consequently, the firms that choose this pricing model do not pay a lot of attention to the perceived value of the parts they are selling (Datta and Offenberg 5).
The high level of competition in the auto parts industry makes every company seek to be a low cost manufacturer. Thus, when competitors adjust their prices, other companies also tend to adjust their prices to avoid being out-competed (Mago and Pate 344). Employing the competitor pricing mechanism boosts the competitiveness of the prices, thereby maintaining profitability. Nonetheless, competitors, in this case, imply mainstream manufacturers and not imitators. Further, this type of pricing applies to the standard type of parts that can compete in the market.
The third pricing approach applied by companies in the auto parts industry is the differentiated cost pricing. Using this approach, various spare parts are separated into given segments, after which pricing is done based on given parameters (Gervasoni, Rossi, and da Silva 36). Further, a differentiated type of markup is applied to each segment. The two main parameters that are applied in this model are competition and complexity. The segments help determine whether to increase profitability by applying the high markup or matching the competitors by implementing the low markup.
The Factors that Impact on the Pricing of the Group
Some factors affect the pricing of auto parts in the automobile parts industry. The parameter is the cost of the raw materials. The automobile parts industry requires some raw materials to produce the required parts for their automotive clients. One such component is steel. The price of steel is highly volatile, meaning that it increases and decreases rapidly, consequently affecting the profit levels. Consideration of such factors affects pricing.
The second factor is labor costs. Labor is a key variant in the production process. To ensure maximum profits, the price charged should factor in the cost of labor. This way, the company can retain its profit margins when the necessary deductions are implemented.
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