Improve your Negotiating Position & Achieve Cost Savings with Supplier Cost Insight

Improve your Negotiating Position & Achieve Cost Savings with Supplier Cost Insight

April 24, 2013

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Today’s Speaker

Paul Robinson

Senior Economist, IHS Pricing & Purchasing

Senior Economist, Pricing and Purchasing Group, IHS Global Insight

Paul Robinson is an economist in the IHS Global Insight Pricing and

Purchasing group. He is a graduate of the George Washington University,

where he earned a BA in economics and international affairs with a

concentration in international economics. He currently works in the ferrous

metals division, specializing in raw materials and assisting on the Steel

Monthly, Steel Industry Review and Weekly Pricing Pulse publications.

Paul has spoken about commodities at a number of conferences, including IHS

conferences in Monterrey, Mexico (Commodities Outlook: Will Renewed

Economic Growth Bring Higher Costs? ) and Mexico City, Mexico

(Commodities Outlook: Purchasing Strategies for 2011), as well as the

Association for the Advancement of Cost Engineering (AACE) conference in

Anaheim, CA (Economic Risks To Consider Before Bidding Your Next

Contract).

Best Practices in Strategic Sourcing & Procurement Improve your Negotiating Position &

Achieve Cost Savings with Supplier

Cost Insight Paul Robinson

Senior Economist, IHS Pricing and Purchasing Service

24 April 2013


Our starting point…

But are lower costs filtering through to buyers?

http://www.business-standard.com/

http://www.vision.org/visionmedia/news_from_reuters.aspx


Agenda

• Case Study #1: Power Plant Fights Valve Price Increase

• Margin Analysis

• Cost Breakdown

• Case Study #2: A&D Company Tracking Alloy Costs

• Alloy Clarity

• Cost Tracking via Chemistry

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Agenda


• Margin Analysis

• Cost Breakdown


• Alloy Clarity


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Industrial Valve Price Increases

Problem

• A major power generation

company faced another

year of 5% price increases

on their industrial valve

purchases

Solution

• IHS Pricing and

Purchasing Service

Purchasing Analyzer

provides a toolset to push

back

• Input cost breakdown and

forecasts

• Demand forecasts

• Labor productivity forecasts

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Industrial Valves Price and Cost

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Multi-Year

Margin Expansion

Source: History – BLS; Forecast – IHS Pricing and Purchasing Service

(2007Q1 = 1.0)


Is There Room to Negotiate?

• What if I am tied to a single seller?

• What if I am a smaller buyer who can’t get volume discounts?

• What if I buy a highly engineered product?

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• What if I am tied to a single seller?

• What if I am a smaller buyer who can’t get volume discounts?

• What if I buy a highly engineered product?

• Yes, margins will be higher, but they shouldn’t be expanding

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The Key to Negotiation: Cost Structure

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Industrial Valve Input Costs

DIRECT LABOR 20.10 %

Avg Hourly Earnings, Fabricated Metal Products, Units: $/Hr 20.10 %

DIRECT MATERIALS 51.30 %

Merchant Bar, Carbon Steel 4.20 %

Structural Shapes, Carbon Steel 3.80 %

Bolts Nuts Rivets and Washers 3.40 %

Metal Stampings 0.40 %

Fabricated Metal Products 7.90 %

Iron Foundries 10.20 %

Steel Foundries (Except Investment) 3.50 %

Copper and Other Nonferrous Foundries (Except Die Castings) 4.50 %

Nonferrous Forgings 4.50 %

Rubber and Plastics 3.30 %

Industrial Electric Power 1.40 %

Supplies for Manufacturing Industries 4.20 %

INDIRECT COSTS 28.60 %

Compensation, Private, Management, Business, and Financial Workers 13.60 %

Compensation, Private, Professional, Scientific, and Technical Workers 11.20 %

Capital Equipment 3.80 %

Source: IHS Pricing and Purchasing Service Purchasing Analyzer


Identify Key Cost Components

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Avg Hourly Earnings, Fabricated Metal Products, Units: $/Hr 20.10 %


Merchant Bar, Carbon Steel 4.20 %

Structural Shapes, Carbon Steel 3.80 %

Bolts Nuts Rivets and Washers 3.40 %

Metal Stampings 0.40 %

Fabricated Metal Products 7.90 %

Iron Foundries 10.20 %

Steel Foundries (Except Investment) 3.50 %

Copper and Other Nonferrous Foundries (Except Die Castings) 4.50 %

Nonferrous Forgings 4.50 %

Rubber and Plastics 3.30 %

Industrial Electric Power 1.40 %

Supplies for Manufacturing Industries 4.20 %


Compensation, Private, Management, Business, and Financial Workers 13.60 %

Compensation, Private, Professional, Scientific, and Technical Workers 11.20 %

Capital Equipment 3.80 %



Iron Foundries

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+5.4%

CAGR

+2.7%

CAGR


(1980M12 = 100)


A Complete Cost Picture…With Little Concern

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Share of

Cost

2013 Forecast

Price Growth

Total Input Cost 100% 0.4%


Avg Hourly Earnings, Fabricated Metal Products, Units: $/Hr 20.10 % 2.4%


Merchant Bar, Carbon Steel 4.20 % -15.2%

Structural Shapes, Carbon Steel 3.80 % -7.6%

Bolts Nuts Rivets and Washers 3.40 % 0.2%

Metal Stampings 0.40 % 0.5%

Fabricated Metal Products 7.90 % 0.6%

Iron Foundries 10.20 % -0.1%

Steel Foundries (Except Investment) 3.50 % 1.9%

Copper and Other Nonferrous Foundries (Except Die Castings) 4.50 % 1.0%

Nonferrous Forgings 4.50 % 1.5%

Rubber and Plastics 3.30 % 1.2%

Industrial Electric Power 1.40 % 3.7%

Supplies for Manufacturing Industries 4.20 % 0.7%


Compensation, Private, Management, Business, and Financial Workers13.60 % 2.2%

Compensation, Private, Professional, Scientific, and Technical Workers11.20 % 2.5%

Capital Equipment 3.80 % 1.3%

Lowest

escalation since

2009!


A Downward Shift in a Key Cost Component

Why?

• Iron ore supply (iron ore

production) growing faster

than iron ore demand

(steel production)

• Labor costs stagnant in

many developed

economies where highly

engineered castings are

made

What does it mean?

• Your supplier is seeing

lower costs

• A fall in price in a key cost

component is your key

negotiating point

• Leverage this information

in negotiations to save

>3% on this spend

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Understanding Supply/Demand Dynamics

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(2007Q1 = 1.0)


Shortcomings of the Input Cost Approach

• Input cost breakout can be difficult to obtain

• Make a best guess and ask your supplier to correct it, they can’t say it is

wrong without saying why!

• No accounting for supply/demand strength

• IHS Pricing and Purchasing Service Purchasing Analyzer provides

productivity and demand to complete the picture

• Even a sole supplier or producer of a highly engineered

product must be responsive to falling input costs and

demand

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Results?

• Input costs are leveling off

• DO NOT ACCEPT THE SAME INCREASES AS RECENT

YEARS!

• Savings of 3% are possible, $30,000 on a $1 million spend

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Agenda


• Margin Analysis

• Cost Breakdown


• Alloy Clarity


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Rare Alloy Buys

Problem

• Major aerospace and

defense company buys a

rare alloy 17-7 PH (also

known as UNS 17700) for

its strength, hardness,

formability, and corrosion

resistance

Solution

• Build a custom cost

forecast using the IHS

Pricing and Purchasing

Service Alloy Cost

Calculator

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• Rare alloy with relatively small market

• Alloys not widely traded on exchanges

• Ferro-chrome

• Ferro-silicon

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• Rare alloy with relatively small market

• Alloys not widely traded on exchanges

• Ferro-chrome

• Ferro-silicon

• Again, systematic cost tracking is key

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Alloy Purchasing

• Understanding contracting is essential

• Many alloy contracts are linked off of visible prices like the London Metal

Exchange

• Others are more vague

• The chemistry breakdown is key

• Cost and chemistry quite different (Nickel >$15,000; Steel <$1,000)

• Indexing by price rather than chemistry is inaccurate

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Chemistry for UNS17700 (17-7 PH)

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Source: AK Steel


Forecast for UNS17700 (17-7 PH)

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Source: IHS Pricing and Purchasing Service Alloy Cost Calculator

(US Dollars/Metric Tonne)


The Dangers of Price vs. Chemistry Weighting

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(2002:1 = 1.0)

Source: IHS Pricing and Purchasing Service Alloy Cost Calculator


Insight into Alloy Costs

Why?

• Understand the whole

picture of alloy cost and

price movements

• Break down each material

contributor

What does it mean?

• Price declines have mostly

passed, but prices will be

flat in the future

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Shortcomings of the Alloy Cost Approach

• No accounting for supply/demand strength

• No accounting for other overhead

• Transportation costs

• Non-variable cost wages

• The Alloy Cost Calculator is the starting point for negotiations, not

the ending point

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Results?

• Many ferro-alloys have come down in price in recent years

• Make sure your contracts are set up to take advantage

• UNS17700 alloy is down 33% from 2011Q1 to 2012Q4…get the

savings!

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The Bottom Line

• Tremendous commodity price volatility has placed additional need for

reliable and timely pricing information

• You don’t want to pay too much!

• IHS offers the solution:

• Pricing analysis and insight for more effective supplier negotiations

• More than 40 years of pricing experience and expertise

• Established reputation as one of the most accurate economic forecasters

• Our web-based Cost Analyzer tool minimizes the risk of overspending in a supplier

negotiation

• Average cost savings of 1 – 1.5% of your total material spend

• Resulting in real bottom-line cost savings!

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How is the Service Used?

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Is a Price Increase Justified?

IHS will help you

to develop points for negotiation

Contracting Purchasing Benchmarking

• Strategic review

of the purchasing

organization

• Could there be

some give in the

price?

• How are prices

behaving?

• What’s behind

the moves?

Cost Planning


A Service with an ROI

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Our Pricing and Purchasing service finds the hidden money in your supply chain to maximize savings!

A transportation equipment manufacturer used our Pricing and Purchasing

service and saved $2.2 million in one buy [supplier negotiation]

A client saved nearly $1 million buying 10 million pounds of Polyethylene on

advice from an IHS expert on when to lock in his delivery price [contract timing]

Our analysis and individualized assistance helped correctly calculate the true

cost to the U.S. government and saved the Department of Defense and US

taxpayers $520.6 million on three contracts [contracting]

A large building materials manufacturer saved 10-15% on aluminum buys

[contract timing]


Broad Global Price Coverage

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North America Europe Asia-Pacific Rest of World Total

Electronic Components (1,000+ Prices) are available to add on to any of the P&P packages

Agricultural Modules: Grains, Sugar, Dairy, Oils, Livestock, Biofuels are available to add on to any of the P&P packages

Labor (200+ Wages) Labor (200+ Wages) Labor (100+ Wages) Labor (100+ Wages) TOTAL WAGES: 750+

Energy (100+ Prices) Energy (150+ Prices) Energy (10+ Prices) Energy (≈100 Prices) TOTAL ENERGY PRICES: 400+

Steel (50 Prices) Steel ( ≈50 Prices) Steel (20+ Prices) Steel (≈10 Prices) TOTAL STEEL PRICES: 100+

Non-Ferrous (≈50 Prices)

Non-Ferrous (20 Prices) Non-Ferrous (10+ Prices)

Non-Ferrous (2 Prices)

TOTAL NON-FERROUS PRICES: ≈100

Chemicals (≈100 Prices)

Chemicals (50+ Prices) Chemicals (≈50 Prices)

Chemicals (2 Prices) TOTAL CHEMICAL PRICES: ≈200

Building Materials Capital Eq Paper/Packaging Logistics Indirect Spend




TOTAL OTHER PRICES: 400+

TOTAL NORTH AMERICAN PRICES AND WAGES: 700+

TOTAL EUROPEAN PRICES AND WAGES: 400+

TOTAL ASIAN PRICES AND WAGES: 100+

TOTAL RoW PRICES AND WAGES: ≈200

GLOBAL PRICING COVERAGE: 1300+ Prices and Wages


Thank you!

Paul Robinson

Senior Economist, Pricing & Purchasing Service

[email protected]

mailto:[email protected]


IHS Commodity Price Watch Report

*Offer limited to qualified entities until April 30th, 2013.

How to Receive Free Analysis?

Limited time offer to all attendees…


IHS Regional Events & Speaking Engagements

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Meet IHS Pricing & Purchasing Experts at

these Regional Events:

April 28 – May 1, 2013

ISM Annual Conference – Dallas, TX

May 8, 2013

ProcureCon – Brazil

May 9, 2013

Plastics Symposium - Plastics Innovation & Resource Center

May 17, 2013

Motor Vehicle Metal and Resins Conference – Detroit, MI

May 21-22, 2013

World Procurement Congress – London, UK

May 20-21, 2013

IHS Forum – Amsterdam, NL

June 4-5, 2013

CAPS Research Asian Roundtable – Shanghai, China

June 30 – July 2, 2013

AACE Annual Conference – Washington, DC

Meet with IHS Experts at ISM Dallas, TX | April 28 – May 1 | Booth #801


We Want Your Feedback on Today’s Topics

Everyone completing the entire

survey at the conclusion of

today’s live event will be

entered into a drawing to win a


For More Information

Send questions and requests for information to:

[email protected]

Visit IHS.com/PricingPurchasing for more information

41

mailto:[email protected]

Improve your Negotiating Position & Achieve Cost Savings with Supplier Cost Insight

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