Yesterday we talked through a couple obvious use cases for daily price data services. Today we review three additional use cases. As the use of price data becomes more ubiquitous, what companies do with the data has become far more strategic. Savvy sourcing organizations have gotten into the business of transforming price data points to actual market intelligence, serving as the basis for specific sourcing strategies. We will continue to explore these uses over the coming days.
Using Price Data for Negotiations
Though the use of price data for negotiations may appear obvious, how companies actually deploy these models suggests a wide range of practices. In addition, pricing data can serve both on the front end of a negotiation process as well as on the back-end. Let’s start with the front-end.
In this case, buying organizations may opt for the use of daily pricing data when they strategically source a metal category in which the metal portion of the total cost “floats against market, but the sourcing organization competitively bids and holds fixed the value-add premium. We have seen this use case used dozens of times in our strategic sourcing engagements.
Often, buying organizations deploy what we call the “3-bid monthly buy, essentially bidding out the company’s total metal requirement on a monthly basis. Under that scenario, the buying organization doesn’t realize that it often places both elements of its purchase up for a spot market bid both the metal and the value-add. More strategic buying organizations bid the category and competitively bid and hold fixed the value-add portion and merely bid the metal premium. Sometimes a buying organization can win using the 3-bid method, but over time, we’d contend that the strategic sourcing process of splitting out the two results in a lower total cost of ownership.
So how do metal buying organizations use daily price data on an ongoing basis? Invariably, they use it when producers announce price increases. Our anecdotal evidence suggests this case presents itself more commonly for steel purchases than other metals.
The scenario plays itself out this way: US Steel recently announced a $60/ton increase on carbon flat rolled steel to the spot market price. Buying organizations began scratching their heads. We received emails such as this: “I’m trying to figure out how much US Steel’s raw material costs have gone up. They just instituted a $60 a ton increase to the spot market price, I don’t see it from a raw material aspect. In short, buying organizations use daily price data to track raw material costs.
Pricing Data Used for Global Sourcing
We see a couple of uses of price data in the field of global sourcing. The first involves the use of the data to monitor global markets and identify when it may make sense to globally source semi-finished products.
Whereas the service centers and distributors take greater advantage of global sourcing opportunities for semi-finished metal products than OEMs (though some of very largest OEMs remain exceptions) by tracking global price points, companies can take advantage of arbitrage opportunities.
We’d argue the bulk of western manufacturers more likely than not buy more value-add metal products from global suppliers (vs. semi-finished products) such as fasteners, sub-assemblies, etc. and for them, the value proposition of using a daily global price data service allows them to keep their overseas suppliers honest in terms of the impact of metal prices increases on the total cost of the particular item sourced globally. We see this in our own MetalMiner IndX pricing service.
In a follow-up post, we’ll cover a couple of advanced use case scenarios for daily metal price data.