There are many things we don't know about how the world works. Nobody can say for sure how the universe began, nor have they a definitive answer for why people (and dogs) dream.
Likewise, you may not fully understand why the costs of electronic components are what they are, nor how the manufacturer settled on that price. Perhaps you've been living by a simple “See parts request; go get cheapest parts” method of sourcing.
In reality, a component’s price tag doesn't tell the whole story for the OEM or industrial sourcing agent.
Want to really earn your keep as the master of your supply domain? Time to do what dogs and dreaming people can't: Use reason to understand the “why” instead of only the “what.”
7 Influences on Electronic Component Cost That Impact Sourcing Strategy
To reduce costs, lead times, and quality issues, learn these top seven influences on electronic component prices:
- Demand
- Raw material availability
- Order volume
- Quality
- Is the part custom or obscure?
- The production process
- Delivery
1. Demand
At surface level, this is the factor procurement specialists are most familiar with. An imbalance between component supply and demand can tip the price scales in one direction. A low-demand part is likely to cost less, while a surge in demand can make a part scarcer, resulting in higher cost.
An electronic part shortage can be the repercussion of an evolving, long-term industry trend. Or, it can be a sudden, game-changing event. Or, it forms as a lingering, dark, and unpredictable cloud that may burst into chaos next week, next year, or never at all.
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You’ve surely noticed unprecedented demand for electronic components in the s. The No. 1 culprit? an explosion in consumer electronics, automotive advancements, and even smart home technologies. At times, these industries have sucked the component supply nearly dry, leaving smaller manufacturers and less mainstream applications scrambling for scraps.
Semiconductors are a prime example, where major players in automotive and consumer electronics are reliant on these chips like never before. Semiconductor makers are struggling to keep pace, often leaving smaller and lower-priority businesses in a tough spot.
World issues also play a major role in component availability, especially if you source from overseas:
- Pandemic: In COVID-19’s early stages, many major manufacturing hubs shutdown, leading to long-term aftershocks in component production and delivery.
- Political tensions: Geopolitical conflicts can lead to goods becoming inaccessible or factories being shut down.
- Tariffs: Trade barriers can limit the viability of ordering overseas components, hampering your supply chain efficiency.
Cost-Saving Tip: Look for an alternative component solution that won’t hamper the design. Be open to older or less in-demand products that could work just as well (or very close to it) for a lower price.
2. Raw Material Availability
Electronic components are sensitive, delicate, intricate, and amazing little feats of human technology. To do their jobs, they need high-quality materials to match, such as:
- Copper
- Silicon
- Rare-earth metals
Naturally, the use of one raw material vs. another influences a component’s final price. Some of the materials necessary for high electronic performance are on the pricey side. (Hello, gold.)
Unfortunately, raw material supply chains are also vulnerable to the same geographical and political issues as finished components. Lack of raw materials can also cause a supply chain reaction of sorts, causing component production to bottleneck and further strain availability.
In short, to accurately gauge a part’s long-term forecast, you should check the pulse of both the product and raw material markets.
Just look at ’s copper material shortage. This was – and still is – the result of increased demand for electronic products as well as competition from growing markets. Electric vehicles, in particular, need a heavy dose of copper for their batteries and wiring.
Cost-Saving Tip: If a future project will require critical components that use a scarce material, buy them in bulk proactively while they’re readily available.
3. Order Volume
At the grocery store, do you ever check the pet treat shelf’s “cost per pound” prices listed next to the standard prices? If you’re lucky, the 10 lb. bulk bag is a better deal than the 5 lb. bag and really good deal compared to the 1 lb. bag.
You know this principle as economy of scale, and it’s huge in electronics manufacturing.
Generally, larger order quantities prompt manufacturers to pass the money they save on overhead onto the customer. When fixed production costs like setup and tooling are spread over a larger number of units, the manufacturer benefits – and so, hopefully, do you.
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Different parts by different manufacturers may come with different minimum order quantities (MOQs). If you’re only shopping for prototype development or small-scale production, this can be a problem. Some suppliers do allow a bit of haggling when it comes to minimum quantities. If not, you can always seek an alternative supplier with more favorable terms.
Cost-Saving Tip: In such scenarios, working with a distributor can sweeten the deal. Distributors bulk-order parts based on total demand across all of their customers, giving them leverage to negotiate better prices. Buying through a distributor also allows you to bypass the manufacturer’s MOQ.
4. Quality
It’s no shocker that the quality of a cable or circuit protector has a huge impact on its pricing. The reason is every financial officer’s favorite acronym: total cost of ownership, or TCO.
Components built to a high standard are more likely to offer better performance, lower defect rates, and greater batch consistency. In electronics manufacturing, you generally get what you pay for, though the specifics of balancing quality with cost go a little deeper than that.
Areas of quality that can influence component prices include:
- Material quality: Higher-grade raw ingredients often have better electrical, thermal, and mechanical properties. For example, capacitors with higher-grade dielectric materials can operate more efficiently and withstand higher voltages.
- Performance specs: Components that are especially fast or accurate often command a premium.
- Reliability & lifespan: Components designed for high reliability and longer operational life logically cost most. They may include better heat, corrosion, or shock resistance so they can operate in harsh conditions.
Quality becomes a bigger cost factor the further you move away from simple consumer electronics. High-quality parts may cost extra if they’re key to user safety in certain mission-critical markets:
- Medical devices
- Transportation
- Aerospace & aviation
- Defense
Components used in these fields must pass strict testing to ensure they perform reliably under special conditions. The need for product certification, such as ISO standards for medical devices or MIL-SPEC for military systems, only adds to the cost.
Cost-Saving Tip: Be mindful that paying more up-front for reliable parts can lead to better product performance and customer satisfaction. Those two outcomes are almost always worth the price.
5. Is the Part Custom or Obscure?
Components that are rare or not widely used typically come with higher costs. It goes back to the basic rule of supply and demand.
Parts produced in lower volumes don’t benefit as much from economy of scale. Manufacturers may need to adjust production lines or order special materials to meet the requirements of these less-common components, further increasing costs.
Customization is what really jacks up the price. Asking a supplier to design and manufacture a custom part means you’re requesting:
- Engineering work
- Special tooling
- Testing for your requirements
A custom order can result in a part that sets you a-part among rivals. However, because you have no alternative sourcing options, the maker is under no competitive pressure of its own to cut you a good deal.
Cost-Saving Tip: Expand your pool of options with electronic distribution services. A distributor with a large supplier network can steer you toward a product line you never knew existed – and fits your assembly and budget perfectly.
6. The Production Process
To put it simply, some parts cost more to manufacture than others.
This usually relates to the degree of difficulty in making the part. Sensors, relays, and the like are delicate components that often require high-precision manufacturing, the latest technology, and talented humans to make them. Guess what good facilities + good machines + good workers equal? Higher production costs.
Features that may increase production costs include:
- Advanced functionality
- Extra-small size
- Other high-precision tolerances
Even within the same product category (i.e. terminal blocks), complexity from one line to another can influence price. If a certain line of terminal blocks requires sophisticated design and manufacturing techniques, expect to foot the bill for the extra production expenses.
Cost-Saving Tip: There’s not much you can do about this aspect of pricing on the manufacturer side. Source an alternative if you can’t stomach the cost of intricate craftsmanship.
7. Delivery
The when, where, and how of ordering electronic components play a role in determining final cost.
If you need an extra-tight lead time, it’ll almost certainly raise the price accordingly. Remember, when you request special treatment from a vendor, you’re asking it to deprioritize other buyers’ orders and disrupt production schedules.
Accepting a slower delivery time may lower your up-front costs. Be sure to balance that with your own project timeline, or you might lose operational efficiency and ROI down the road.
Your distance from the source of parts also factors into the final cost. This factor depends on how many locations the manufacturer, the distributor, and you have.
Cost-Saving Tip: Multisourcing your component supply can reduce your reliance on a far-away source.
Electronic Component Cost-Saving Means More Than Sticker Price
Now that you know the full story of how a manufacturer prices a component, you can source electronics on strategy rather than instinct (or panic). You should also be able to order and reorder more quickly and proactively.
You’ve probably sensed another running theme: lifetime value.
Cost efficiency in supply chain management isn’t about grabbing the first cheap component you see. By taking time to compare distributors, suppliers, and parts, you can save up-front (sticker price) and in the long run (avoiding recalls and early replacement). That’ll always end in a better TCO than reactively chasing the tail of an elusive, high-demand part.
For more tips on sniffing out electronic component cost trends and trouble ahead, grab our free e-book:
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