By Rod Sherkin
Researching suppliers' costs before renegotiating prices is standard practice in our profession. What isn't standard, however, are the data we use to support our arguments. The best data are reliably sourced cost trends, trends that relate directly to the raw materials suppliers actually buy.
Not everyone uses this kind of data. In a recent survey, 25% of purchasers told us they sourced supplier-cost data for free, mainly through search engines like Google. This kind of data can easily lead to paying higher prices.
Here's an example. A popular, free information source is the U.S. Bureau of Labor. Its well-known statistics, like the Consumer Price Index (CPI) or the Producer Price Index (PPI), are commonly used in contracts to calculate what suppliers can charge. The problem is these indexes are not reliable indicators of suppliers' raw material costs, especially when these costs go down.
Witness: Over the past two years, raw material cost have fallen sharply: steel down 36%; plastic (HDPE) down 26%; aluminum down 15%; lumber down 26%; natural gas down 46%. The CPI, on the other hand, has gone in the opposite direction: Up about 1.3%
Suppliers are clearly paying less for raw materials which means you should be paying less for what you buy. By tying what you pay to indexes like the CPI, you can miss out on opportunities to negotiate lower prices, especially in times like these.
Other common sources are trade journals and websites offering free information. You need to consider the objectivity of their data. They are not government agencies and, therefore, require revenue. And this money usually comes from suppliers that advertize in their publications (and possibly supply data as well).
Some free sources are great, however! The Wall Street Journal (almost free) publishes commodity prices on exchanges in New York, London, and Chicago, covering a wide variety of important metals and agricultural products--a very good source if your suppliers use these raw materials.
Pay-for-use websites are also good sources. Most provide reliable, objective data that relate directly to raw materials, making it easy to build a window into your suppliers' costs. Many are well priced; some even pay for themselves the first time you use them. Certainly worth considering as you put together your information portfolio.
View the webcast, #1 Reason Money is Left on the Negotiating Table
Rod Sherkin is the President of ProPurchaser.com Inc. Established in 1999, ProPurchaser provides purchasing professionals with information and tools to help them better prepare for negotiations and raise the profile and status of the purchasing profession by increasing senior-management awareness of its strategic, profit-boosting potential.
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