Daily Archives: December 2, 2014

Procurement Trend # 11. Transparent Pricing

Only eight anti-trends remain. Doesn’t sound like much, but when you consider that we have been blasting away at these for two months now, it’s still a lot, especially since it’s going to take us another two and a half weeks to reach the last anti-trend that the futurists gave us. At least most of the “future” trends are recent enough that the older generation can actually remember their inception. (No, not the Leonardo DiCaprio movie!) But I have to agree with LOLCat that it would be nice if there was a way to stop the beat of the futurists‘ drum because, even with these trends that started in some of our life-times, the drum has been beaten to death and I fear, like LOLCat, that the futurists’ may soon return to the age old art of cat-skinning to make a new one!

So why do these hopped-up historians (who’ve obviously had one dozen lagers too many) keep pushing transparent pricing as a future trend? Besides alcohol-induced brain-cell asphyxiation, possibly because they’re still trying to figure out this new-fangled thing called a computer and still struggling to understand just what the world wide web can do for them. Regardless, it’s clear that they’ve just figured out that:

  1. the internet makes global commodity market data instantly accessible

    even in far-away places like China and Russia and Australia

  2. online marketplaces makes average market price data instantly accessible

    including prices that are actually paid by the public or contract prices that will actually be honoured because the contracts are with the public sector

  3. should cost models allow for reasonably accurate price estimation
    which can be calculated in real time using the data from #1 and #2

    so there is no excuse for not knowing when you are being over-quoted 20% by a supplier’s sales rep who thinks you are too dumb to know otherwise

So, what does this mean to you?

Commodity Markets

You should always know the current market price of any base commodity that you are buying and/or that the products you are buying are dependent on (if that commodity generally accounts for 10% or more of the product cost). You should subscribe to commodity market feeds, track them, and set up alerts anytime there is a significant change in prices one way or another over a short time period as this is often a signal to lock in a new contract (before prices climb to high), extend a current contract (if it looks like prices are going to skyrocket and then stay high for a while), or spot buy (if prices are declining and are expected to steadily drop over a period of time) until the time to lock in a new contract is right.

Consumer Marketplaces

You should always know the average price of any consumer good that you are buying in the open market or in the public market as public contracts are public! Don’t just rely on 3-bids and a buy for standard consumer goods, office suppliers, or other off-the-shelf purchases. Get baseline market data and negotiate from there based on leverage, economies of scale, and projected pricing trends.

Should Cost Models

Raw market data combined with local labour market data, local energy market data, and good should cost models will give you a good idea of what you should be paying for any custom manufactured good. Don’t go into a sourcing event without this baseline. If the suppliers have a history of colluding, and you don’t know it, that 5% you knock off of current pricing could still be 15% higher than what the supplier needs to charge to make a profit margin at the high-end of what suppliers in the vertical typically make.