Summary scenario

Your current situation

You are buying products which are relatively closely related to market commodities for which market pricing is available. However, you have limited ability to switch suppliers

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 market pricing, as shown in the benchmark price index, to establish cost saving opportunity

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 small basket of closely-related products.

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

  • The products your company buys are closely related to market commodities, in terms of specification and cost
  • 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 Quebracho Extract for 20 years with the same group of suppliers
  • The Quebracho extract they purchase needs to be filtered three times to reach exceptional purity
  • There are monthly price discussions based on the best offer of the suppliers
  • The supplier claim they are passing on savings from their input cost on to their customers
  • This is the price development over 10 years at the company

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

  • Purchase market pricing data for related market commodities
  • Benchmark the price development of your products against a 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
    • Qualify a third and fourth supplier if the potential price gap is significant
    • Establish a price mechanism with your preferred suppliers
  • Continue to track your prices against market developments

Case study continued:

  • The company wants to check developments against official market index of quebracho extract
  • They purchase 5 years worth of Quebracho Extract price data
  • The Quebracho Extract market price data is based on a commodity grade, and shows a lower US$ cost than the company is paying
  • Accordingly, the create an index where they benchmark the Quebracho commodity as 80% of the value of their product

    Case study outcome:

    • The company saw that there was a correlation between the market price index and their baseline price
    • They also noticed that their suppliers were fast to increase prices with the market, but slow to decrease them
    • They noticed that their announcement to benchmark prices against the market created a price decrease in March 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.
    Clarify of focus The increased understanding gained from a full-cost price index helps to identify categories where there is excess profit and where prices have more room to move. In addition, any categories where the prices show the greatest increases vs the underlying market price index require the greatest focus.
    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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