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Analyst Eye on avoiding the supplier silence treatment – the silent slope

Bertrand Maltaverne

When price rises for raw materials, such as copper or wheat, are market-driven or are defined by market fluctuations, the procurement professional can be sure their supplier will be on the phone to set expectations of cost increases. But it’s not a two-way street. When market prices fall, you can be sure the phone won’t be ringing off the hook!

This is what our senior research analyst Bertrand Maltaverne calls the ‘silent slope.’

The concept of silent slopes made it into mainstream media headlines earlier this year when some European governments explored potential action over the failure of consumer prices to evolve in line with the drop in certain raw material and commodity prices.

“What do you think happens when, for example, the price of copper goes down?” he asked an audience at a workshop he was hosting. “Nothing,” came the answer. Because suppliers don’t necessarily proactively revisit their price downwards (except, of course, if you have a contract with a price revision clause based on a market index [e.g. LME for copper], but that is another story).

“Prices will inevitably go up, and subsequently they often come down, like we’ve seen with energy. But the consumer doesn’t always experience that price drop. And when it comes to the procurement professional, they know their suppliers are not going to ring them with the same good news. So it’s the buyer’s job to understand the cost structure of the category they are buying,” he says.

“Understanding the cost (and cost drivers) of labor, raw materials, transportation and so on, must be in the remit of the buyer and are a key element in Category Management. Using their sourcing tool, they have to be able to create a cost breakdown that can arm them with knowledge (to develop sound sourcing strategies, compare offers between them and against the market, etc.) before even creating a sourcing event.”

In addition to mastering cost structures, buyers need to have outside-in intelligence on the evolution of the cost drivers we mentioned. When price hikes are minimal, it’s less of a big deal to the buyer. But when they are significant, it’s important to know your market. So our analyst has some basic advice for buyers to avoid the silent slope:

  • “Always understand the cost structure of your category; this way you understand the contribution of each element and how they inter-depend and impact sourcing strategies. For example, if the cost of a part is mostly related to its raw material, then savings opportunities related to moving from a supplier in Europe or North America to Asia will be minimal or even non-existent as shipping costs, duties, additional inventory, etc. will rise. The same consideration applies to labor costs as opportunities may or may not exist depending on the share that labor represents in the total cost and on what labor costs are. If a part is produced using automation then opportunities to save by moving production from one country to another will be minimal. Think leading and lagging indicators.”
  • Where you have knowledge, you can leverage where you and your supplier can optimize. By understanding price/price drivers and through transparency, intimacy and trust, you change the conversation by focusing on what is possible (finding solutions together is better than simply asking for a discount).”

There are of course a number of technology-related conditions needed for market intelligence, including:

  • Data analytics to have a detailed understanding of price breakdowns and drivers at the supply level that can be rolled up at category and end-product level.
  • Contract/pricing management (and ordering) to identify, set up and manage renewals and even price revisions clauses and schemas.
  • Outside-in intelligence to track markets and commodities and have forecasts to be constantly on the alert.

To avoid silent slopes you need capabilities across the S2P process (without even mentioning category management, supplier relationship management, the ability to execute what-if scenarios, build preventive playbooks and assess trade-offs for existing and new products). See our Design for Supply series.

Among Spend Matters content and tools, any victim of the silent slope can find knowledge and guidance. Do you know which capabilities you need from your technology provider?

We have lately conducted in depth assessments of tech vendors that can bring outside market intelligence inside. Check out:

Mintec — market intelligence, commodity data and analytics tools, for the food and beverage sector, including materials pricing, labor considerations, risk factors and other considerations that may affect the supply of raw materials.

What’s The Price — a solution built to quickly provide procurement professionals with insights into the should-costs and prices of any product or commodity, whether raw materials or complex products.

The Smart Cube — a solution for high-performing intelligence that answers critical business questions through custom research, advanced analytics and best of breed technology, transforming data into insight.

Beroe — a solution that delivers category-focused insights (price, inventory levels, lead time, etc.) and benchmarking on a large number of categories.

Resilinc — established player in the SCRM space with deep ESG and risk capabilities. It also offers differentiated capabilities to monitor orders and prices that are particularly valuable for direct materials management.

Analyst Eye
supplier management