Your current situation
You are buying a category of products, and the category is closely related to market commodities for which market pricing is available. However, you have limited ability to switch suppliers for most products in the category
Documenting the price development of a category over time is complicated, as there are portfolio and currency impacts as well as price. To benchmark the category performance vs the market is complicated, as there are different products in the category.
The proposed solution
The first task is to develop a baseline price index for the category. Once this has been established, you need to establish a relevant market price index.
The business benefits
There will be increased transparency on price trends in your business for each of the key categories, which will help to understand margin development. The benchmark against a market index will help to understand the risk and focus requirement.
baseline price index
The baseline price index is the price development of a basket of different products which are closely related and grouped into a category
Benchmark price index
The benchmark price index is reliable market information of price development of identical or very similar products.
Detailed description with Case Study
Your current situation
- Your company buys a category of products, which are closely related to market commodities, in terms of specification and cost
- Some of the products in the category are bulk commodities and others are smaller volumes and more specialized
- Your company has a long list of established suppliers for different parts of the category
- For some of the products in the category, it is not easy to qualify new suppliers or to replace in your supply chain
- The suppliers have generally been competing on price for the larger volumes
- The suppliers have been reliable in terms of service and quality
- How to calculate the a price index of a category of different products
- A company has been buying different grades of Ethanol for many years
- The Ethanol specifications in the category include
- Products which are large volume commodities
- Products which have smaller volumes and have special requirements e.g. very low NIA (non intentionally added substances)
- There are quarterly price discussions for some products and annual discussions for other products
- The supplier claim they are passing on savings from their input cost on to their customers
- This is the price development of the category over recent years at the company
The issues faced by the company
- Your current suppliers will be conscious of the lack of true competition on the specialties
- Over time, their willingness to produce or subsidize the smaller volumes with the larger volume will reduce
- Over time, different suppliers will supply the bulk commodity and the specialties
- Price development will become less transparent vs market trends, creating risk of increasing premium
- Purchase market pricing data for related market commodities
- Develop a category price index for the whole category
- Benchmark the price development of your category against the market index over the last 5 years
- Calculate the price opportunity from the benchmark market price index and consider options:
- Confront existing suppliers with the trend vs the benchmark price index
- Consider to group some of the specialties with the bulk volumes where possible
- Continue to track your prices against market developments
Case study continued:
- The company checks price developments of the Ethanol category the market index of Ethanol commodities
- They purchase 4 years worth of Ethanol market price data
- The Ethanol market price data is based on bulk grades, and shows a lower US$ cost than the company is paying
- Accordingly, the create an index where they benchmark the Ethanol commodity as 100% of the value of their product
Case study outcome:
- The company saw that there was a strong correlation between the market price index and their category price development
- However, the prices for their category were trending to being over-priced. This is clearer from the variance chart…
- The company also realised that the LATAM trend on Ethanol was more advantageous that Europe
- This was due to the excess of natural Ethanol, which might provide opportunity in Europe in due course
- They decided to continue the benchmarking from then on….
|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.|
|Clarify of focus||The increased understanding gained from a category price indexes highlights potential between regions as well as vs the market|
|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.|
|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.|
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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