Daily Archives: January 11, 2024

Are Vendors Demanding Ridiculous Cost Increases due to “Inflation”? Maybe you should tie them to an index when you ask What’s The Price!

Buynamics WTP was founded by two former CPOs and a Purchasing IT Guru back in 2015 after they had spent years being stymied at every reasonable request for open costing and reasonable justifications for significant price increases from opaque vendors where the salespeople did everything to prevent cost insight so they could maximize their margin, and their bonus. Tired of being forced into 20% cost increases when only 2% were justified, the founders of Buynamics WTP decided to do something about it and started Buynamics to build a solution that would provide them with insights into the cost drivers, and actual material costs, that they could use to start fact-based negotiations. [ In other words, the solution we are about to describe in this article was designed and built by buyers, who know exactly what output is needed to negotiate. ]

Since their founding, Buynamics has hired only two types of people: Procurement People (who know how to buy and have expertise in the categories they bought to help Buynamics design a better solution and explain it to interested buyers) and IT People (to build it). They don’t sell (consultant) services, they sell subscriptions to a platform that can provide deep insight into just about any product you buy and, as of this year, many standard services as well. Plus, if you pay for the Upply data subscription, you can get deep insight into current freight costs in different regions and, in 2024, there will be extended cost modelling support for logistics, which we’ll discuss later.

Their primary product offering is Buynamics What’s the Price which is their index-based negotiation support product that, in their words, “gives [you] access to the one-pager that your supplier never wanted to share“. You are able to see it all: the commodity costs, the change over time, the cost breakdown (materials, labour, energy, transportation, and overhead) and the appropriate (estimated) margin calculation. You can verify whether their steel cost actually did go up 20% over the past year, and, even if it did, if it justifies a 20% increase. (If steel is only 30% of the total cost of the product, than the most the cost should increase is 6% unless there is also a transportation or energy cost increase, which could be the case in the EU right now [since the sanctions on cheaper Russian Oil and Gas].) It could be that only an 8% increase is justified, and that’s a lot easier to argue with the data.

The What’s the Price module is extremely straightforward with only 6 areas of functionality: cockpit (the entry dashboard), the prices & indices, the industry cost profiles, the cost models, the reports, and the settings. The platform is designed to help a buyer get to the point, and it does that, which is why it’s so great. (Buyers need insights, not complicated tools — those are for cost engineers in the plants.)

In the Prices & Indices Section, the buyer can pull up the prices and changes over time for any commodity, salary, or freight rate tracked by the system. For a commodity, they just have to select the commodity/salary/freight rate (using easy search) and define a date range and up comes the start and end price, average price over time, % change, and a detailed line chart (which can be swapped or overlaid with a mutation chart, moving average, or index). For a job description, they just select the job title(s) and it brings up the average price and typical range (per month). For freight, you simply select the index by country and type (contract, spot, domestic, cross-border, long-distance, etc.).

In the Industry Cost profiles, you can pull up any NAICS code or keyword and see the typical cost breakdown for all products in that category using industry census data — specifically, the direct materials, direct labour, manufacturing overhead (contract work, CAPEX depreciation, energy, MRO, rentals, waste removal, etc.), GSA & Other Expenses and Profit at a high level, with drill in capability to the labour, manufacturing overhead, and GSA. By selecting the country of origin, the data is then complemented based on labor costs and energy rates prevailing in that region.

In addition, you can dive in and the software will calculate the economies of scale based on your growth potential that you are entitled to claim from repeat orders (since you should only pay for so much CAPEX depreciation, etc.) by simply estimating the fixed overhead and G&A of your vendors. (In 2024, you’ll be able to select the transportation index of choice, and get a complete cost model with freight.)

Prices & Indices are useful when you are looking at contract renewals (for quick insight into negotiation with an incumbent), cost profiles are incredibly useful when you’re looking at shifting more business to an incumbent (to negotiate a bigger discount), but the core of the product is in the cost models. You pull in (or enter) your bill of materials, select the NACIS code and the country, and using the current prices and the most recent industry cost profile breakdown, the platform will calculate the estimated total cost of a product using all the data it has. (So if materials account for 33.3% of the cost and add up to $10, then the platform knows the that the total product cost is expected to be $30 and estimates the cost breakdown across labour, overhead, GSA, and typical profit using the region-specific cost data and industry cost profile.

The buyer can build as many cost models as she likes, set up alerts to get updates on a regular basis or when a change occurs in the price that surpasses a threshold (be it due to material cost, energy cost, labour cost, or other significant factor), and see how the cost models have changed over time (since the time they last sourced, for example). (Also, the alert can be set to a percentage change or a financial impact within your organization.) And if you provide the price you are currently paying, it will also calculate how much you are likely overpaying per unit by cost component.

With respect to settings, besides defining system alerts, a user can also maintain their own settings to not only see their interface the way they want to (currency, formats, auto-tracked prices, cost profiles, [active] models, etc.), but reset them on the fly (so they can see prices in Euros when they are negotiating with European suppliers, Yuan when they are negotiating with Chinese suppliers. etc.).

With respect to depth, it tracks index data for over 3000 raw materials and commodities across over 160 countries and uses this to power over 360 built-in industry cost structures. When it comes to services, it tracks salaries for over 750 positions across 37 industries, and over 115 cost profiles, for over 170 countries and regions. Buynamics integrates with the full extent of Upply data (which built their cost indexes from neutral freight pricing from over 750 million invoiced freight transactions) and has detailed up to date market pricing for air (freight; worldwide), land (road, esp. EMEA and North America), and sea (worldwide).

It’s literally everything a buyer needs to start a fact-based index-based negotiation as the buyer understands what the cost should be unless the supplier has a unique situation where certain costs are higher than average (and the supplier is willing to prove it). It also helps the buyer understand when they are getting a reasonable deal and when they are truly paying actual cost increases only, and not just claimed cost increases.

So if you want to understand what you should be paying before you start a negotiation; the extent to which commodity, energy price, labour, or transportation price changes really affect you; and what the real cost drivers are (or where the supplier truly isn’t competitive), then the buyer should acquire Buynamics WTP today. It’s really the only platform that does index-based negotiation support (vs. stochastic analytics, CAD driven analytics, process model analysis, or hand-built cost models that typically require cost engineers and sometimes even PhDs).