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

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Suppliers are always quick to point to higher input costs, but when was the last time a supplier awarded you with lower prices?

When negotiating price, there’s no better position you can be in than one of an informed buyer with a complete understanding of your suppliers cost structures. Join IHS for this 1-hour webcast, to obtain best practices for improving your negotiating position with suppliers. We will highlight key commodities which have seen falling prices in the past six months, and look at ways to highlight these declines with your suppliers. Learn how to take advantage of falling prices in key cost components to improve your negotiating position.

A recording of this presentation can be viewed here: http://www.slideshare.net/ihs_supplychain/improve-your-negotiating-position-achieve-cost-savings-with-supplier-cost-insight-improve-contract-negotiations

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

  1. 1. Improve your Negotiating Position & Achieve Cost Savingswith Supplier Cost InsightApril 24, 2013Welcome to Today’s Webcast
  2. 2. Copyright © 2013 IHS Inc. All Rights Reserved.Before We Get Started• Ask questions any time• Type questions into the “Ask a Question” area, click ‘submit’• The slides advance automatically throughout the event• Need help? Click the Help(?) icon below
  3. 3. Copyright © 2013 IHS Inc. All Rights Reserved.Live Tweet today’swebcast:#IHSWebcast3Join the Conversation:Follow @IHS4SupplyChain on Twitter
  4. 4. Copyright © 2013 IHS Inc. All Rights Reserved.4We Want Your Feedback on Today’s TopicsEveryone completing the entiresurvey at the conclusion oftoday’s live event will beentered into a drawing to win a
  5. 5. Copyright © 2013 IHS Inc. All Rights Reserved.5Today’s SpeakerPaul RobinsonSenior Economist, IHS Pricing & PurchasingSenior Economist, Pricing and Purchasing Group, IHS Global InsightPaul Robinson is an economist in the IHS Global Insight Pricing andPurchasing group. He is a graduate of the George Washington University,where he earned a BA in economics and international affairs with aconcentration in international economics. He currently works in the ferrousmetals division, specializing in raw materials and assisting on the SteelMonthly, Steel Industry Review and Weekly Pricing Pulse publications.Paul has spoken about commodities at a number of conferences, including IHSconferences in Monterrey, Mexico (Commodities Outlook: Will RenewedEconomic Growth Bring Higher Costs? ) and Mexico City, Mexico(Commodities Outlook: Purchasing Strategies for 2011), as well as theAssociation for the Advancement of Cost Engineering (AACE) conference inAnaheim, CA (Economic Risks To Consider Before Bidding Your NextContract).
  6. 6. Best Practices inStrategic Sourcing &ProcurementImprove your Negotiating Position &Achieve Cost Savings with SupplierCost InsightPaul RobinsonSenior Economist, IHS Pricing and Purchasing Service24 April 2013
  7. 7. Copyright © 2013 IHS Inc. All Rights Reserved.7Our starting point…But are lower costs filtering through to buyers?
  8. 8. Copyright © 2013 IHS Inc. All Rights Reserved.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 Chemistry8
  9. 9. Copyright © 2013 IHS Inc. All Rights Reserved.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 Chemistry9
  10. 10. Copyright © 2013 IHS Inc. All Rights Reserved.Industrial Valve Price IncreasesProblem• A major power generationcompany faced anotheryear of 5% price increaseson their industrial valvepurchasesSolution• IHS Pricing andPurchasing ServicePurchasing Analyzerprovides a toolset to pushback• Input cost breakdown andforecasts• Demand forecasts• Labor productivity forecasts10
  11. 11. Copyright © 2013 IHS Inc. All Rights Reserved.Industrial Valves Price and Cost11Multi-YearMargin ExpansionSource: History – BLS; Forecast – IHS Pricing and Purchasing Service(2007Q1 = 1.0)
  12. 12. Copyright © 2013 IHS Inc. All Rights Reserved.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?12
  13. 13. Copyright © 2013 IHS Inc. All Rights Reserved.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?• Yes, margins will be higher, but they shouldn’t be expanding13
  14. 14. Copyright © 2013 IHS Inc. All Rights Reserved.The Key to Negotiation: Cost Structure14Industrial Valve Input CostsDIRECT 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
  15. 15. Copyright © 2013 IHS Inc. All Rights Reserved.Identify Key Cost Components15Industrial Valve Input CostsDIRECT 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
  16. 16. Copyright © 2013 IHS Inc. All Rights Reserved.Iron Foundries16+5.4%CAGR+2.7%CAGRSource: History – BLS; Forecast – IHS Pricing and Purchasing Service(1980M12 = 100)
  17. 17. Copyright © 2013 IHS Inc. All Rights Reserved.A Complete Cost Picture…With Little Concern17Source: IHS Pricing and Purchasing Service Purchasing AnalyzerIndustrial Valve Input CostsShare ofCost2013 ForecastPrice GrowthTotal Input Cost 100% 0.4%DIRECT LABOR 20.10 %Avg Hourly Earnings, Fabricated Metal Products, Units: $/Hr 20.10 % 2.4%DIRECT MATERIALS 51.30 %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%INDIRECT COSTS 28.60 %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%Lowestescalation since2009!
  18. 18. Copyright © 2013 IHS Inc. All Rights Reserved.A Downward Shift in a Key Cost ComponentWhy?• Iron ore supply (iron oreproduction) growing fasterthan iron ore demand(steel production)• Labor costs stagnant inmany developedeconomies where highlyengineered castings aremadeWhat does it mean?• Your supplier is seeinglower costs• A fall in price in a key costcomponent is your keynegotiating point• Leverage this informationin negotiations to save>3% on this spend18
  19. 19. Copyright © 2013 IHS Inc. All Rights Reserved.Understanding Supply/Demand Dynamics19Source: History – BLS; Forecast – IHS Pricing and Purchasing Service(2007Q1 = 1.0)
  20. 20. Copyright © 2013 IHS Inc. All Rights Reserved.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 iswrong without saying why!• No accounting for supply/demand strength• IHS Pricing and Purchasing Service Purchasing Analyzer providesproductivity and demand to complete the picture• Even a sole supplier or producer of a highly engineeredproduct must be responsive to falling input costs anddemand20
  21. 21. Copyright © 2013 IHS Inc. All Rights Reserved.Results?• Input costs are leveling off• DO NOT ACCEPT THE SAME INCREASES AS RECENTYEARS!• Savings of 3% are possible, $30,000 on a $1 million spend21
  22. 22. Copyright © 2013 IHS Inc. All Rights Reserved.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 Chemistry22
  23. 23. Copyright © 2013 IHS Inc. All Rights Reserved.Rare Alloy BuysProblem• Major aerospace anddefense company buys arare alloy 17-7 PH (alsoknown as UNS 17700) forits strength, hardness,formability, and corrosionresistanceSolution• Build a custom costforecast using the IHSPricing and PurchasingService Alloy CostCalculator23
  24. 24. Copyright © 2013 IHS Inc. All Rights Reserved.Is There Room to Negotiate?• Rare alloy with relatively small market• Alloys not widely traded on exchanges• Ferro-chrome• Ferro-silicon24
  25. 25. Copyright © 2013 IHS Inc. All Rights Reserved.Is There Room to Negotiate?• Rare alloy with relatively small market• Alloys not widely traded on exchanges• Ferro-chrome• Ferro-silicon• Again, systematic cost tracking is key25
  26. 26. Copyright © 2013 IHS Inc. All Rights Reserved.Alloy Purchasing• Understanding contracting is essential• Many alloy contracts are linked off of visible prices like the London MetalExchange• 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 inaccurate26
  27. 27. Copyright © 2013 IHS Inc. All Rights Reserved.Chemistry for UNS17700 (17-7 PH)27Source: AK Steel
  28. 28. Copyright © 2013 IHS Inc. All Rights Reserved.Forecast for UNS17700 (17-7 PH)28Source: IHS Pricing and Purchasing Service Alloy Cost Calculator(US Dollars/Metric Tonne)
  29. 29. Copyright © 2013 IHS Inc. All Rights Reserved.The Dangers of Price vs. Chemistry Weighting29(2002:1 = 1.0)Source: IHS Pricing and Purchasing Service Alloy Cost Calculator
  30. 30. Copyright © 2013 IHS Inc. All Rights Reserved.Insight into Alloy CostsWhy?• Understand the wholepicture of alloy cost andprice movements• Break down each materialcontributorWhat does it mean?• Price declines have mostlypassed, but prices will beflat in the future30
  31. 31. Copyright © 2013 IHS Inc. All Rights Reserved.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, notthe ending point31
  32. 32. Copyright © 2013 IHS Inc. All Rights Reserved.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 thesavings!32
  33. 33. Copyright © 2013 IHS Inc. All Rights Reserved.The Bottom Line• Tremendous commodity price volatility has placed additional need forreliable 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 suppliernegotiation• Average cost savings of 1 – 1.5% of your total material spend• Resulting in real bottom-line cost savings!33
  34. 34. Copyright © 2013 IHS Inc. All Rights Reserved.How is the Service Used?34Is a Price Increase Justified?IHS will help youto develop points for negotiationContracting Purchasing Benchmarking• Strategic reviewof the purchasingorganization• Could there besome give in theprice?• How are pricesbehaving?• What’s behindthe moves?Cost Planning
  35. 35. Copyright © 2013 IHS Inc. All Rights Reserved.A Service with an ROI35Our Pricing and Purchasing service finds the hidden money in your supplychain to maximize savings! A transportation equipment manufacturer used our Pricing and Purchasingservice and saved $2.2 million in one buy [supplier negotiation] A client saved nearly $1 million buying 10 million pounds of Polyethylene onadvice from an IHS expert on when to lock in his delivery price [contract timing] Our analysis and individualized assistance helped correctly calculate the truecost to the U.S. government and saved the Department of Defense and UStaxpayers $520.6 million on three contracts [contracting] A large building materials manufacturer saved 10-15% on aluminum buys[contract timing]
  36. 36. Copyright © 2013 IHS Inc. All Rights Reserved.Broad Global Price Coverage36North America Europe Asia-Pacific Rest of World TotalElectronic Components (1,000+ Prices) are available to add on to any of the P&P packagesAgricultural Modules: Grains, Sugar, Dairy, Oils, Livestock, Biofuels are available to add on to any of the P&P packagesLabor (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 (≈50Prices)Non-Ferrous (20 Prices) Non-Ferrous (10+Prices)Non-Ferrous (2Prices)TOTAL NON-FERROUSPRICES: ≈100Chemicals (≈100Prices)Chemicals (50+ Prices) Chemicals (≈50Prices)Chemicals (2 Prices) TOTAL CHEMICAL PRICES:≈200Building MaterialsCapital EqPaper/PackagingLogisticsIndirect SpendBuilding MaterialsCapital EqPaper/PackagingLogisticsIndirect SpendBuilding MaterialsCapital EqPaper/PackagingLogisticsIndirect SpendBuilding MaterialsCapital EqPaper/PackagingLogisticsIndirect SpendTOTAL OTHER PRICES: 400+TOTAL NORTHAMERICAN PRICESAND WAGES: 700+TOTAL EUROPEAN PRICESAND WAGES: 400+TOTAL ASIAN PRICESAND WAGES: 100+TOTAL RoW PRICESAND WAGES: ≈200GLOBAL PRICINGCOVERAGE: 1300+ Pricesand Wages
  37. 37. Copyright © 2013 IHS Inc. All Rights Reserved.Thank you!Paul RobinsonSenior Economist, Pricing & Purchasing Servicepaul.robinson@ihs.com
  38. 38. Copyright © 2013 IHS Inc. All Rights Reserved.38IHS Commodity Price Watch Report*Offer limited to qualified entities until April 30th, 2013.How to Receive Free Analysis?Limited time offer to all attendees…
  39. 39. Copyright © 2013 IHS Inc. All Rights Reserved.IHS Regional Events & Speaking Engagements39Meet IHS Pricing & Purchasing Experts atthese Regional Events:April 28 – May 1, 2013ISM Annual Conference – Dallas, TXMay 8, 2013ProcureCon – BrazilMay 9, 2013Plastics Symposium - Plastics Innovation & Resource CenterMay 17, 2013Motor Vehicle Metal and Resins Conference – Detroit, MIMay 21-22, 2013World Procurement Congress – London, UKMay 20-21, 2013IHS Forum – Amsterdam, NLJune 4-5, 2013CAPS Research Asian Roundtable – Shanghai, ChinaJune 30 – July 2, 2013AACE Annual Conference – Washington, DCMeet with IHS Experts at ISMDallas, TX | April 28 – May 1 | Booth #801
  40. 40. Copyright © 2013 IHS Inc. All Rights Reserved.40We Want Your Feedback on Today’s TopicsEveryone completing the entiresurvey at the conclusion oftoday’s live event will beentered into a drawing to win a
  41. 41. Copyright © 2013 IHS Inc. All Rights Reserved.For More InformationSend questions and requests for information to:Webcasts@ihs.comVisit IHS.com/PricingPurchasing for more information41

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