Since introducing the “Non-Price Attributes” series here, we have discussed the following:
- Supplier Market Share
- Quality & Past Performance
- Production and Delivery Capabilities
- Who the Supplier Is
Next on our list of non-price attributes to be used in making sourcing decisions should be supply risk which is both an important and complex issue. It is certainly a non-price attribute with huge implications (in many cases). But, supply risk is a topic worthy of its own series (and its own website), so we’ll circle back with a supply risk series (on this website) in the future.
Today, we’ll look at two aspects of supplier cost (1) the bid structure and expected buying behavior and (2) variable cost components.
In truth, it would be hard to categorize either consideration as a non-price attribute since both have price elements that are embedded in the supplier’s calculated bid price or the expected total cost of a supplier contract. But, the impact of each on the actual contract cost over a multi-year period may be subject to a wide range of scenarios that should be analyzed and understood.
Buying Behavior and the Bid Structure
For this attribute, let’s use the example of an RFQ for a multi-year contract that captures supplier price variables for different (1) order volumes, (2) order lead times, and (3) value-added components. In this example, the sourcing team would be wise to use an eSourcing tool so that it could capture electronically the pricing tiers for the different volume bands and lead times and a pricing matrix to capture all of the different prices based on the value-added component mix.
As the RFQ is structured, there should be a basic assumption made regarding the most likely buying pattern that will occur over the course of the contract [Sidebar: The buying behavior is the non-price attribute that must be considered for a bid of this type] so that the different supplier prices are properly weighted and the supplier (or suppliers) that are selected can deliver the assumed order pattern at the lowest cost. Now, many enterprise-level eSourcing tools can structure an RFQ to capture this bid data and enable some basic scenario analysis to look at what happens when the initial order assumptions are changed (or re-weighted).
But, the bid analysis complexity in our example RFQ grows exponentially based upon the number of suppliers, bid lines, and order variations such that an eSourcing tool with an optimization engine like those available from BravoSolution, Iasta, and a handful of others can be worth its weight in gold as different award scenarios that are based upon different order assumptions and sourcing strategies (for ex. to single source or not) can be developed to find the most desired award strategy. These advanced sourcing tools can also help sourcing teams better understand and capture the best bids by letting suppliers set their own pricing tiers. Beyond identifying the best supplier mix, these tools can show sourcing teams the benefit/savings that larger orders with longer lead times can generate and help modify buying behaviors.
Variable Cost Components
Ok, now we’ll quickly discuss the importance of looking at suppliers’ variable cost components (versus fixed costs) in the delivered item or service. The number and volatility of the underlying components as well as the duration of the contract will help determine how important this consideration should be in the final award decision. Of course, the structure of the supplier contract is most important – if the contract has variable pricing, this is consideration is a major one. Now some may feel that having a fixed price supplier contract makes this consideration irrelevant. Those that do, however, are forgetting the commodity bubble of 2007 when many suppliers rolled out new higher pricing despite their existing contracts.
Suppliers are generally hesitant to provide an item or service cost breakdown since they believe that providing that level of detail to their prospects and customers provides a sizable negotiation advantage to their counterpart. One other reason is that suppliers may not know how to (or be able to) produce a cost structure that resembles reality.
Nonetheless, getting this level of detail during the bidding process can identify relative pricing risks between supplier bids based upon the fluctuation of different variables/inputs/components. For example, different manufacturing or assembly processes and their locations can create differences in the cost of labor, transportation, and power needed to produce the output as well as the cost and mix of the underlying raw materials. Companies managing numerous categories with volatile price components should consider using solutions like those found in Zycus’ procurement performance suite which help category managers track commodity pricing shifts and model the impact of these shifts on budgets and savings.