Summary scenario

Your current situation

You are buying a category of products which have 1 or  critical feedstocks for which market pricing is available. However you have no transparency on those feedstock prices 

issues faced

Over time it will be difficult to benchmark your procurement performance of a category due to lack established benchmark trend data.

The proposed solution

Your category price development will be tracked against the development of the feedstock price index to ensure pricing does not deviate too far from the key feedstock trends without clear reasons

The business benefits

Your prices will trend in line with transparent market trend, or alternative suppliers will need to be qualified against a defined cost saving target

baseline price index

The baseline price index is the price development of a categroy of products

Benchmark price index

The benchmark price index is reliable market information of price development of critical feedstocks

Detailed description with Case Study

Your current situation

  • Your company purchases a number of different product categories
  • You do not track the price performance of categories as whole
  • So, you are not able to benchmark the performance of each category
  • You have not looked into price development of the feedstocks closely, or other market benchmarks
  • In some categories, level of competition is higher than in others
  • Your focus has been on ensuring price decreases. Some years you are more successful than others
  • The other KPIs you track are cost savings, and other competitiveness targets
  • Your suppliers have been reliable in terms of service and quality and there is no burning issues
  • Prices have been relatively stable and predictable
  • In short, you have no real grip on the performance per category

Case study:

  • A company has approximately 12 large categories of products which they purchase globally
  • The procurement team is spread out globally, reporting to local general managers
  • Coordination between procurement staff is on an adhoc basis, driven by need for expert support
  • There is a corporate procurement team who coordinate policy and strategy
  • Each category has a strategy, though execution is poorly tracked
  • Prices have been decreasing for 2 years, in line with macro-economic factors
  • For one of the categories, Emulsifiers, the corporate team has established the performance over the last 5 years based on a standard basket
  • The performance looks like this:

The issues faced by the company

  • Your current suppliers will be conscious of the lack of true competition and benchmarks
  • Over time, their willingness to lower market pricing will reduce, and pricing will become less competitive
  • With lower volumes, your company runs the risk of overpaying 
  • To qualify new suppliers may be required, but will take a minimum period of 12-24 months
  • Support from supply chain and R&D may be limited if the potential price savings are unattractive

Proposed action

  • Determine relevant feedstocks for the category range
  • Source or Purchase feedstock pricing data for critical feedstocks
  • Work with industry or R&D experts to split the category into % impact from critical feedstocks
  • Benchmark the price development of your category against the feedstock index over the last 5 years
  • If there is a major deviation from the benchmark feedstock index, consider the reasons:
    • It could be a demand issue or a shortage of production capacit
    • Fine-tune the index based on correlation and increased learning
  • If there is no clear reason for the deviation, consider how to increase competitiveness in the category

Case study continued:

  • The company worked with R&D and agreed that Palm Oil, Ethylene Oxide and Energy were the key cost drivers of their range of Emulsifiers
  • The price development of the key feedstocks was as follows

Case study outcome:

  • The company benchmarked the Emulsifier price trend against the agreed benchmark and came up with a strong correlation
  • They realised
    • Prices were a little too stable and they missed out on savings in 2017
    • That there was an immediate risk of future price increases
  • They decided to continue the benchmarking from then on….

 Business benefit

Lower prices Over time, the increased transparency of benchmark price indexes will lead to increased awareness of potential for price decreases and a stronger position to push for price decreases.
Better cash management An established benchmark price index based on critical feedstocks or other cost drivers will give advanced warning of potential price decreases and increases. This leading indicator gives opportunity to alter planning parameters to increase or reduce inventory.
Support sales price increases An established benchmark price index based on critical feedstocks or other cost drivers will give advanced warning of potential price decreases and increases. This leading indicator will enable an early start to condition sales teams and customers for potential price increases, as well as build the business case.
Reduce business risk and surprises Benchmarks based on critical feedstocks enable a greater insight of exposure to feedstock shortages, supply risk, market collusion and price surges. This will reduce business risk by diversifying exposure to single feedstock sources and the early warning on potential price increases will reduce business risk
Better grip on procurement performance The benchmark of company pricing against a market index will help to understanding price performance in  a few ways. It will help procurement to explain to senior business management on price developments, and it will help senior management get a better grip on areas which require key focus.

Procure Analytiq

DELIVER DIRECT MATERIAL SAVINGS

ProcureAnalytiq is an online cloud-based software tool to track market developments and leading indicators related the direct material purchases for your business. 

ProcureAnalytiq enables user to faster reaction to market changes, better negotiations, automated forecasting of material pricing, better internal and external communication, and ultimately reduces direct Raw Material prices.

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