Summary scenario

Your current situation

You are buying products which have critical feedstocks and other cost drivers such as Electricity, for which market pricing is available. However you have no transparency on those feedstock prices 

issues faced

Over time you will start to overpay due to lack of leverage over existing suppliers, and lack of established benchmark trend data.

The proposed solution

Your price development will be tracked against the development of the feedstock and cost driver price index to ensure the pricing trends in line with the key cost drivers

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 single product, or a very small basket of closely-related products.

Benchmark price index

The benchmark price index is reliable market information of price development of critical cost drivers

Detailed description with Case Study

Your current situation

  • The products your company buys have clearly identified cost drivers, including chemicals but also production costs
  • You have not tracked the price development of the cost drivers, relying on supplier verbal updates
  • Your company has remained loyal to 2 suppliers over a longer period
  • The products you procure are not the large volumes by market standards
  • The products are not easy to qualify new suppliers or to replace in your supply chain
  • The suppliers have generally been competing on price for a majority and minority share
  • The suppliers have been reliable in terms of service and quality
  • Prices have been relatively stable and predictable
  • You have invited quotations from competing suppliers from time to time, but:
    • Competing suppliers no longer believe there is a genuine opportunity
    • Without significant volume commitment, they do not want to match existing prices

Case study:

  • A company has been buying Red Food Colouring for many years from the same supplier
  • The Red Food Colour is made from Tomatoes and can be called natural on packaging
  • There are annual price reviews based on the best offer of the supplier
  • The supplier claims they pass on savings from their input cost,and share the feedstock developments in slides
  • The critical cost drivers are Tomato and Energy cost
  • The benchmark cost development over time is as follows:

The issues faced by your company

  • Your current suppliers will be conscious of the lack of true competition
  • 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 by 5%-20%
  • 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 cost drivers of your product range
  • Source or Purchase cost driver trend data for critical feedstocks
  • Benchmark the price development of your products against the cost driver index over the last few years to establish the correlation
  • Calculate the price opportunity from the benchmark feedstock price index and consider options:
    • Confront existing suppliers with the trend vs the benchmark price index
    • Qualify alternative suppliers if the potential price gap is significant
    • Establish a price mechanism with your preferred suppliers
  • Continue to track your prices against cost driver developments

Case study continued:

  • The company checked their red food colouring prices against the benchmarks
  • The price development vs the benchmark was as follows

Case study outcome:

  • The company agreed that the pricing was reasonable with the exception of 2016
  • The supplier explained there was a shortage in 2016 of the type of tomato they need for consistency that the index does not capture
  • They agreed to further refine the index and track it going forward

     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
    Reduce conflict with suppliers The agreement and transparency of key feedstocks and transparency will help manage expectations within your company and the suppliers. Although no price index will replace a commercial negotiation fully, it is in the interest of both parties to establish workable price indexes
    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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