ihs supply chain best-in-class negotiations: achieving ... and events/member events… · cost...

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BEST-IN-CLASS NEGOTIATIONS: ACHIEVING COST SAVINGS Quantifying changing costs can mean the difference between 5% savings and over 20% savings on your procurement contract renewals.

IHS SUPPLY CHAIN

Katie Tamblin MCIPS, Director, Supply Chain Solutions



Agenda • Preparing for Negotiation

• Building a Cost Model

• Wage Differences

• Productivity

• Exchange rates

2


Industrial Material Prices: Back to 2008 Levels

3

IHS’ Material Price Index, 2002w1 = 1.0

0

1

2

3

4

5

6

7

8

9

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

IHS Material Price Index - Dollar Based IHS Material Price Index - Exchange Traded Commodities IHS Material Price Index - Non-Exchange Traded Commodities


What does that mean for me?

• I buy equipment, not materials

• My contract isn’t indexed

• I use the CPI/RPI to estimate cost changes

• I rely on my supplier to communicate his cost

conditions

4

How can I quantify the impact of material price declines on the things that I buy?


Preparing for Negotiations: Quantify Suppliers’ Cost Production Cost Model, Generators, United Kingdom 2013

Q3 2014

Q3 2015

Q3 2016

Q3 Direct Labour £ per hour 22.0% 16.95 17.28 17.63 18.06 Steel Sheet £/metric

ton 23.9%

376 333 269 265 Aluminum £/metric

ton 2.7%

1,148 1,192 1,025 1,033 Copper £/metric

ton 6.2%

4,563 4,191 3,387 3,150 Rubber £/metric

ton 4.2%

1,409 1,390 927 853 Electronics Index 9.6% 97.4 97.4 97.9 95.4 Supplies Index 10.0% 111.5 109.6 104.7 106.5 Professional Wages

Index 13.1% 613.7 627.3 635.7 656.8

Electricity £/MWh 4.5% 60.2 51.1 60.3 63.0 Capital Equipment Index 3.8% 108.6 109.8 111.1 112.1

Total Cost Cumulative % change -- -2.3 -9.2 -8.9 Raw Materials Cumulative % change -- -8.7 -27.4 -29.5

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• Understand the relative importance of key materials in the manufacturing process

• Quantify price change for those key materials

• Build a cost model that replicates your suppliers’ production process

Armed with knowledge of the underlying cost drivers that impact your suppliers, you can prepare for negotiations effectively, and achieve a fair market price.


Raw Material Declines Make Cost Savings Achievable

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Hot-Rolled Steel Sheet • Total Production Costs: -41.6% • Scrap: -61.2% • Coal: -9.6%

Metal Stampings • Total Production Costs: -12.6% • Hot-Rolled Steel Sheet: -49.4% • Galvanized Steel Sheet: -36.4%

Steel Pipe • Total Production Costs: -22.9% • Steel Plate: -62.5% • Iron and Steel Foundries: -0.1%

Valves • Total Production Costs: -9.9% • Iron Foundries: -1.7% • Copper Foundries: -11.3%

Mining Machinery

• Total Production Costs: -5.2% • Bar Steel: -38.1% • Iron and Steel: -25.5% • Speed Changers: 4.1%

Aircraft Engines • Total Production Costs: 2.2% • Forging and Stamping: -3.9% • Iron Foundries: -2.0%

Raw

Mat

eria

ls In

term

edia

te G

oods

Fi

nish

ed G

oods

Peak to Trough Declines through Feb 2016 in Key Categories throughout Supply Chains

Source: IHS


Understanding Costs: Finding & Verifying Data

What goes into the product I am buying?

• Raw commodities:

• Commodity exchanges, World Bank, national statistical offices, internal data, premium data

• Mid-stream inputs:

• National statistical offices, internal data, premium data

• Wages and productivity:

• National statistical offices, World Bank, International Labor Organization, internal data, premium data

How much of each input is used?

• Economic census

• Census of manufacturers

• Internal data such as invoices,

BOMs, spending categories

• Your suppliers

• Premium data sources

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Commodity inputs are comparable across regions

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An electric motor manufactured in Asia…

will have similar components as an electric motor manufactured in North America…

… but their costs are completely different


Determining labor cost

• Labor cost is the amount of labor needed to produce one unit of output

• Labor cost is a function of wages and productivity

• Wages vary widely across, and even within, countries

• Education, experience, and mechanization of the workforce can all influence productivity

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Country Manufacturing wage (£/hour)

Productivity (relative to UK)

Labor cost (£/hour)

United Kingdom 17.58 1.00 17.58

United States 18.96 1.41 13.40

China 2.29 0.39 5.80

Mexico 2.05 0.36 5.74

Source: IHS


Labor cost can look very different once productivity is taken into account

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0.002.004.006.008.00

10.0012.0014.0016.0018.0020.00

United Kingdom United States China Mexico

Straight Wage Labor Cost*

Manufacturing labor cost (£/hour compared to UK)

Source: IHS Notes: * Adjusted based on manufacturing output per employee in comparison to UK


Exchange rate effect on cost

• Currency fluctuations can have a huge impact on input costs, as well as the cost of a finished good, especially as most commodities are priced in US dollars

• If your currency is appreciating against the dollar, commodities will be

“cheaper” i.e. you will need less of your currency to purchase the same

amount of a given commodity

• If your currency is depreciating against the dollar, commodities will be “more expensive” i.e. you will need more of your currency to purchase the same amount of a given commodity

• Two important questions to ask regarding exchange rates:

1. Am I purchasing a finished product in a different exchange rate?

2. Is my supplier purchasing inputs in a different exchange rate?

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Currency can offset/enhance commodity price changes

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-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

2010 2011 2012 2013 2014 2015 2016 2017

Material Prices, Pounds Sterling Material Prices, RMB Material Prices, Euro

Industrial materials deflated by local currency (percent change year ago)


What does that mean for buying in the UK?

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Achieving Cost Savings / March 2016

0.675

0.725

0.775

0.825

0.875

0.925

-40%

-20%

0%

20%

40%

60%

80%

100%

2010 2011 2012 2013 2014 2015 2016 2017

British pounds per euro Stainless Steel, Pounds Sterling Stainless Steel, Euros

Stainless Steel Prices UK versus Eurozone (percent change year ago)


Summary: Key Takeaways

Cost models are a powerful tool to negotiate prices

• Quantify the impact of commodity declines

• Bring transparency and relevance to negotiations

• Can be used to assess your suppliers’ margins over time

Commodity prices are important, but not the whole story

• Labor costs, productivity, and exchange rates also are key

determinants in how your suppliers’ costs are moving

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IHS Customer Care: Americas: +1 800 IHS CARE (+1 800 447 2273); [email protected] Europe, Middle East, and Africa: +44 (0) 1344 328 300; [email protected] Asia and the Pacific Rim: +604 291 3600; [email protected]

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