Daily Archives: October 12, 2006

The Internet and the Purchasing Knowledge Revolution

A great presentation at the Fourth Annual International Symposium on Supply Chain Management was Rod Sherkin’s presentation on The Internet & the Purchasing Knowledge Revolution.

Rod Sherkin, of propurchaser.com started off by reminding us that purchasers are very busy people and that shorter planning cycles (as a result of flexible manufacturing), smaller inventories, and unreliable information can make them busier by the day.

Then Sherkin reminded us that one of the best way to reduce your time as a purchaser is to manage one of the major time traps – price hassles. Do this by:

  1. Tracking suppliers’ input costs and
  2. Tying what you pay to their costs.

For example, if you are buying steel office chairs – find out what percentage of their cost is raw materials and tie your overall cost to their cost of steel. Every time steel rises or falls by a fixed percentage during the term of the contract, your price should go up or down according to a fixed amount, depending on the percentage that steel contributes to your supplier’s total cost. For example, if steel is 50% of your supplier’s cost, and you set a threshold of 3%, then every time steel goes up by 3% you should accept an increase of 1.5% in product cost but, more importantly, every time steel goes down by 3%, your supplier should concede you a cost reduction of close to 1.5%.

Furthermore, the best suppliers should see an advantage to linking your prices to their costs and prefer to compete in a transparent arena where they can win by keeping their costs down and their productivity up.

They should be more than willing to agree on a base market index and, furthermore, tie that to a neutral currency index. After all, if they are buying from China and a neutral China steel index shows steel going up by 4%, but you are buying in American dollars and the dollar has risen 13% in the same time period, then your costs should actually decrease since your buying power has increased by 8.65% (1.13/1.04).

And with the internet, you should have no problem keeping a watchful eye on your supplier’s relative cost increase or decrease on an agreed upon time period (every shipment, month, quarter, etc.). (After all, neither your accounts payable or their accounts receivable are going to be overly interested in calculating cost differentials on a daily basis.)

In addition, if you track your suppliers’ inputs, you can, in addition to negotiating automatic price reductions:

  • attract low cost producers (as they live to compete in open markets),
  • strengthen the supply chain,
  • reduce suspicion and acrimony, and
  • benefit sellers as well as purchasers.