Summary scenario
Your current situation
You are buying 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 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 price index to ensure the pricing trends in line with the key feedstocks
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 feedstocks
Detailed description with Case Study
Your current situation
- The products your company buys contain clearly identified feedstocks
- You have not tracked the price development of the feedstocks closely, 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 Orange flavour for a duck-a-la-orange microwave dish for 3 years from the same suppliers
- The Orange flavour is qualified with the disk and microwave suitable and PSR qualified
- There are annual price reviews based on the best offer of the supplier
- The supplier claims they pass on savings from their input cost
- The price development over 3 years at the company is as follows:
- 2018: Price increase 2%
- 2019: Price increase 2%
- 2020: Price decrease 9%
- The price decrease of 9% was a surprise, as they were told that “the orange juice price had stayed constant from Qtr 4 2019 to Qtr 1 2020”
The issues faced by the 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 feedstocks for the product range
- Source or Purchase feedstock pricing data for critical feedstocks
- Benchmark the price development of your products against the feedstock index over the last 5 years
- 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 feedstock developments
Related posts
Case study continued:
- The company checked the price of orange juice and found it had decreased during 2019
- The price development vs the Orange Juice benchmark was as follows
Case study outcome:
- The company agreed that the pricing at the start of 2019 was set fairly, but felt that the supplier should have been more transparent during 2019
- The supplier argued
- That they purchase orange juice on forward cover and did not benefit from the collapse in price in 2019
- The other costs had increased significantly due to new food legislation
- They both agreed a further 5% decrease for 2020
- 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 |
| 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.
Interested to explore more?
Price index introduction
Price index use cases
