Best Practices

Negotiate With the Right Data

In a recent survey, 25% of purchasers told us they rely upon free, open-source cost data accessed through search engines like Google. Some of this data is fine but not all of it is suited to the task at hand.

Researching suppliers’ costs before negotiating prices is a standard best practice for many procurement professionals. What isn’t standard is the data they use to support that research. The best data are reliably sourced cost trends, trends that relate directly to the raw materials suppliers buy.

In a recent survey, 25% of purchasers told ProPurchaser they rely upon free, open-source cost data accessed through search engines like Google. Some of this data is fine but not all of it is suited to the task at hand.

Here’s an example: the U.S. Bureau of Labor is a popular, free information source. Its well-known Consumer Price Index (CPI) and Producer Price Index (PPI) are commonly used in contracts to calculate what suppliers can charge. While they are free and easy to use, these indexes are not always reliable indicators of what has really been happening to suppliers’ raw material costs, especially when costs are falling.

All commodities fluctuate and so it is common for raw material costs to fall. For example, over the last few months (Q1 of 2019), steel is down about 16%; plastic (HDPE) down by 18%; aluminum down by 5%; and lumber down by 30%. The PPI, on the other hand, is only down marginally (0.3%) over this same period.

When suppliers pay less for raw materials, procurement should pay less for what they buy. Based on the numbers shared above, products made from steel, aluminum, plastic and wood should all cost considerably less today than they did last year. Tying what the company pays to a composite index like the PPI means missing these opportunities to negotiate lower prices.

Other common sources of data are trade journals and websites offering free information. It is important to consider the objectivity of free data. Any site that is not a government agency needs revenue to exist. This money usually comes from suppliers that advertise in their publications, and who may have influence over content.

Fortunately, there are some great, free sources of data: The Wall Street Journal (almost free) publishes commodity prices on exchanges in New York, London, and Chicago that cover a wide variety of metals and agricultural products. The U.S. Department of Commerce provides a wealth of trustworthy statistical information. There is also the London Metal Exchange, and several other trustworthy commodity exchanges operating worldwide.

Pay-for-use websites can also be good sources of information. Most provide reliable, objective data that relates directly to the raw materials suppliers use. For these sources, a free trial is usually available which makes a cost/benefit analysis fairly straight forward. In many cases, these types of websites can pay for themselves quickly.

If you’re interested in judging for yourself if cost transparency really works, join thousands of other procurement professionals and take out a free trial to ProPurchaser (no credit card required).

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