Daily Archives: December 14, 2008

On the Second Day of X-Mas … (Cost Avoidance Basics)

On the second day of X-Mas
my blogger gave to me
two boxing gloves
and a lesson in strategy.

The first boxing glove that I hand to you, to help you beat down proposed price increases, is market and category intelligence. For those of you who have been following the blogs for a few years now, you’ll recall Charles Dominick’s insights over on Supply Excellence a couple of years back in Caveat Emptor: Economic Indices Could Be Misleading You and Supply Market Assessment 101 where he noted that a single commodity index alone does not justify a price increase (or decrease) for that matter.

To truly understand when the price of a part should be rising (or falling), you have to truly understand the marketplace and the component (and raw material) breakdown of the part you wish to buy. The best way to understand this is with the new category intelligence offerings that are being put forth not just by the traditional vendors (like Ariba Supply Watch) but niche vendors with particular specialities like Denali Intelligence and Power Advocate.

Even when buying refined raw materials, to accurately determine a price you need to know where the supplier is buying from, the relevant cost indices of the raw materials in those regions, the relevant exchange rate between your supplier’s supplier and your supplier, it’s expected stability, the relevant exchange rate between your supplier and you, and it’s expected stability. An increase in the steel index in the U.S. is irrelevant if your supplier buys its steel in China. Also, the cost increase in a commodity can often be offset by a recent currency devaluation. Therefore, your first defense against a commodity price increase is a deep understanding of your should-cost structure, gleaned from good category and market intelligence, which will include a supplier’s cost structure.

The second boxing glove that I hand to you, to help you beat down proposed price increases, is a good strategic sourcing process that you can use to find alternative sources of supply. This process should take advantage of the readily available supplier networks that are out there on sites like MFG.com and ThomasNet Purchasing Tools and should be enabled by cross-functional teams that will allow you to quickly and efficiently work through a best-practice sourcing process. After all, even if there are genuine reasons for a cost increase, but your supplier refuses to collaborate to keep costs down for both parties, sometimes you will need to find an alternate source of supply.