The Marketplace and the Five-Hundred Pound Gorilla
Where does a five-hundred pound gorilla sit?
Purchasers know how hard it can be to convince our superiors & peers that we are doing a good job.
We struggle with Suppliers all the time, arguing, calculating, cajoling, pushing back to get the lowest possible all-in costs – and still we sometimes go over budget!
Does this mean we are doing a poor job? Probably not!
One big problem is that our performance is usually measured against a budget based (like a labor budget) on
An item that is bought & sold, especially an unprocessed material, or a cost component with a significant effect on the price a supplier charges.
- paper drives packaging
- diesel drives transportation
- natural gas drives bottles
- last year's numbers, and
- a best guess at this year's numbers.
But the prime cost drivers behind what we pay our Suppliers are the commodities they use to make what we buy. And it is market forces, not Purchasers or Suppliers, that determine the price of metals, plastics, energy, chemicals, etc.
When steel or oil or plastic resin go up, Suppliers naturally charge us more for products made from these raw materials. And when commodity prices go down, they (should) charge us less.
The brutal fact is that market forces are oblivious to our budget assumptions and to our best guesses.
The marketplace is a five-hundred pound gorilla. It sits anywhere it wants to.
Here's what can happen. Suppose your responsibilities included buying steel components in 2004 (cold rolled steel rose 49% that year) or plastics (ethylene monomer rose 62%), you likely paid a lot more than your company had budgeted for – and it wasn't your fault.
Even the world's best negotiator, however experienced or skillful, cannot defeat the gorilla. In fact, acknowledging supplier cost issues and accepting (reasonable) price increases is what you should do! Refusing to pay more can damage your organization, because it jeopardizes the supply-chain. Unprofitable Suppliers are usually poor Suppliers.
So how does a Purchaser demonstrate a good job being done?
One way is to use benchmarks that reflect the changing marketplace conditions.
Imagine you buy an injected polyethylene part. In January, 2009 you paid $2.00 per foot, and now you are paying $2.50. The budget allowed for a 6% increase. You might get your knuckles rapped for the 25% jump.
But look at the market price of the resin, the commodity that largely drives the part's cost. It rose over 60% in the same period. For your plastic part, 25% no longer looks so bad — in fact it looks quite creditable!
You might need to take the lead and encourage your financial colleagues to review the way purchasing effectiveness is measured. Use facts & figures to show how the marketplace gorilla influences your costs.
This is not to question the importance of the annual budget for setting growth & profitability targets. It's just that such targets make poor purchasing performance measures. They can even work against corporate performance, by allowing complacency when prices drop. Achieving your budget for packaging is no great triumph if paper has been falling for a year.
The gorilla sits here, he sits there…
Commodity prices go up and down. It's important to keep abreast of marketplace developments. Not only will this help you explain over-budget numbers and show you're doing a good job, but - equally important – it will automatically prompt you to go after lower prices when commodity costs fall.