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

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Our starting point…
But are lower costs filtering through to buyers?

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
9

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
10

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
13

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
21

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
25

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
30

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
Building Materials
Capital Eq
Paper/Packaging
Logistics
Indirect Spend
Building Materials
Capital Eq
Paper/Packaging
Logistics
Indirect Spend
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
paul.robinson@ihs.com

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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

40
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:
Webcasts@ihs.com
Visit IHS.com/PricingPurchasing for more information
41

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