View Full Version : Saving calculation for Products with prices that correlate with raw material prices

12-14-2009, 04:41 PM
I am required by management to report savings for my purchases. I am responsible for procuring electrical equipment used by power utility company (e.g. transformers, switchgears, power cables, etc.) of which the prices are highly dependent on the prices of metal (such as copper and steel). When the metal prices are soaring, the new contract price is likely to be higher than the previous contract price. In order to avoid from reporting negative savings, I need to calculate the "should-be" price based on the previous contract price projected based on the increase of raw material price during the previous contract period. However, it is difficult for me to assume which raw material attributes to how many % of the finished product price.

I am considering whether it is appropriate for me to specify in the Request For Proposal (RFP) document that the suppliers need to explain the price increase for the case of repeated purchase. For example, if I bought power cable 3 years ago by inviting Suppliers A, B, C to submit tender to me, and finally awarded a 3-year contract to says Supplier A. Before this 3-year contract expires, let's say I am conducting another tender exercise and invite Suppliers A, B, C, D, & E to submit tender to me, the "Request For Proposal" document for Suppliers A, B, & C will ask them to explain the price increase / decrease as compared with their previous tender prices submitted 3 years ago.

I haven't really done so, but I am considering doing so with the purpose of getting more information from the suppliers themselves for me to calculate the "should-be" prices for the saving calculation purpose mentioned above. It's better for the suppliers to tell me their cost structure and explain their price increase, than for me to make arbitrary assumptions about their cost structure. However, is it really appropriate to make such a requirement in the "Request For Proposal" document? Any problem with such a practice? Kindly advise. Thanks.

01-09-2010, 02:07 AM
Its not uncommon for many products or materials prices to fluctuate with the raw materials costs. Procurement strategy is always dependent on the companies business strategy, and cannot be isolated. I.e if the company is looking for quality and cost stability then you have to negotiate a period contract 12,24,36 months to hedge your price and garantee the supplies, the vendor will ofcourse review the index/ trend analysis and will quote you average price that incorporates the fluctuations. You would do the same to arrive @ a target price and negotiate on best terms.

Alternatively, cost escalation based on commodity index is what lot of companies do specially in cables or other products that are commodity based.

Without these parameters it will be difficult to realistically benchmark and show savings or otherwise.
hope this helps
Syed Khan. MCIPS. C.P.P. C.P.M.