CapitalizeFallingPrices_Benchmarking Report_March2015

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© 2015 IHS / ALL RIGHTS RESERVED

PRICING & PURCHASING

BENCHMARKING REPORT

MARCH 2015

Capturing cost savings amidst volatile commodity markets

© 2015 IHS

Introduction

Concessions should be dominating your Supplier negotiations, are you benefiting from the dramatic

commodity price declines seen in the market? Buyers need to be closely evaluating their suppliers cost

structures and expect significant cost savings in the year ahead. This benchmarking report looks at key

trends in procurement focusing on how companies are mitigating the risks of commodity price volatility

today, and capturing maximum savings from their suppliers.

This survey focuses on key topics that procurement teams care about most today, including negotiation

strategies, top spend categories, cost savings pressures, risk and performance goals.

In this report you will find:

• Summary of key findings

• Cost savings techniques being used by your peers

• Observations and key guidance from procurement professionals and IHS economists

We hope you’ll find the insight in this report beneficial. Thank you for the time and insight of the many

supply management professionals who have contributed to this report. We look forward to continuing our

dialogue with you.

© 2015 IHS

Research highlights

Of procurement

teams have a

YOY increase in

their savings

target

Negotiation Strategy Savings Targets Top Challenges

89% of

respondents still

report moderate to

high risk levels for

their spend

categories

of buyers rely on

‘Market Intelligence’ as

their primary method for

capturing cost savings

followed by:

Cost Insight

Linking contacts to

cost escalators

Risk 2-5% (37%)

5-10% (34%)

10%+ (12%)

Lack of time &

resources

Talent shortages

Lack of visibility

© 2015 IHS

Key Findings

4

Negotiation strategies: • 65% of respondents actively negotiate 40% or more of their total spend, 64% expect to see that number rise in 2015

• 72% of respondents cite ‘Better Market Intelligence’ as their primary method for capturing cost savings

Spend categories: • 47% of respondents expect to spend the most on Ferrous metals in 2015, followed by Nonferrous metals (35%), and

transportation (25%)

• Despite today’s low-cost environment, 89% of respondents still report some level of risk for their spend categories

Cost savings targets: • 37% reported a savings target of 2-5% while 34% reported a savings target of 5-10% in 2015

• Supply chain and procurement teams are being asked to save even more with 64% reporting a YOY increase in their

savings target

Performance: • 68% of respondents report having a framework to help quantify/benchmark their buying performance

Top challenges:

#1 lack of time/resources (64%)

#2 talent shortages (39%)

#3 lack of visibility (29%)

© 2015 IHS

Approximately what percentage of your spend do you actively negotiate?

5

20.20%

13.50%

27.90% 26.90%

10.60%

1.00%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

1-20% 20-40% 40-60% 60-80% 80% or more Do not know

© 2015 IHS

Are you planning to increase that percentage in 2015?

6

Yes 64%

No 20%

Unsure 16%

© 2015 IHS

How will your company capitalize on falling material costs?

7

10.60%

24.00%

52.90%

54.80%

54.80%

72.10%

0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% 70.00% 80.00%

Other

Hedging

Should cost modeling

Linking contracts to price escalators

Cost insight

Better market intelligence

Other methods used to capitalize on falling material costs?

8

We have agreements with some suppliers which include regularly scheduled cost/price reviews that

include raw material cost based adjustments. We plan to approach selected suppliers with

significant exposure around the materials that have moved downward to ask them for price

reduction.

Encouraging suppliers to obtain this same market intelligence we use from

IHS. Many do not take advantage of any market intelligence to help their own

costs.

Most of our agreements are tied to

material indexes or hedging.

Connecting Suppliers into a consortium to allow for higher volume buys

on key materials - better pricing.

We help first-tier suppliers in sourcing and risk

reduction strategies, to reduce our own exposure.

“ ”

“

” “

”

“

”

“ ”

© 2015 IHS

What spend categories do you expect to spend the most on in 2015?

9

1.90%

11.50%

12.50%

13.50%

14.40%

15.40%

16.30%

17.30%

21.20%

23.10%

25.00%

34.60%

47.10%

0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% 35.00% 40.00% 45.00% 50.00%

Rare earth metals

Building materials

Paper and packaging

Other

Energy Products

MRO

Wages and benefits

Electronic components

Industrial machinery and equipment

Chemicals

Transportation

Nonferrous metals

Ferrous metals

© 2015 IHS

How risky do you consider your spend categories?

10

11%

52%

34%

3%

Low risk

Average risk

Moderate Risk

High Risk

© 2015 IHS

Do you have a framework to help quantify/benchmark your buying performance?

11

Yes 68%

No 20%

Unsure 12%

© 2015 IHS

With respect to recent falling prices, what is your savings target for 2015?

12

8.70%

36.50%

33.70%

11.50%

9.60%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

1-2% 2-5% 5-10% 10%+ Do not know

© 2015 IHS

With respect to recent falling prices, what is your savings target for 2015?

13

25.00%

9.09%

14.29%

30.00%

7.32%

25.00%

36.36%

14.29%

40.00%

43.90%

66.67%

28.57%

66.67%

40.00%

25.00%

36.36%

28.57%

30.00%

43.90%

33.33%

28.57%

33.33%

40.00%

25.00%

18.18%

42.86%

4.88%

42.86%

20.00%

Aerospace & Defense

Autos, OEM

Chemicals

Consumer & Retail

Diversified Manufacturing

Energy - Power

Energy - Distribution

Mining & Metals

Engineering, Procurement &Construction (EPC)

1-2% 2-5% 5-10% 10%+

© 2015 IHS

How does your 2015 savings target compare to your 2014 savings target?

14

Significantly more 11%

More 52%

About the same 35%

Less 2%

© 2015 IHS

Today, what are the most significant challenge(s) your procurement organization faces in working to meet business goals and objectives?

15

9.60%

12.50%

12.50%

22.10%

23.10%

28.80%

38.50%

64.40%

0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% 70.00%

Lack of management support

Outdated technology

Other

Poor insight

Inability to benchmark performance

Lack of visibility

Talent shortages

Lack of time/resources

© 2015 IHS

About the participants

16

Asia 7%

Canada 1%

Europe 6%

Germany 3%

Ireland 1%

North America 79%

South America 3%

Region

Diversified Manufacturing

43%

Autos, OEM 14%

Consumer & Retail 11%

Energy - Distribution

8%

Aerospace & Defense

7% Chemicals 7%

Energy - Power

7%

Mining & Metals

3%

Industry

© 2015 IHS

Advice for buyers

• You should see flat pricing at worst for many of your purchased

products

• Now is the time to hold your suppliers accountable to price de-

escalation clauses in longer-term agreements If you have linked your contract to an appropriate price index(es), then you should see

slower or falling prices for many products you are buying

• You should also consider hedging to lock in lower commodity prices

• There are a few areas that may present upward pressure but should not

prevent downward pressure in your supply chain

• Use cost modeling and the Purchasing Analyzer to help quantify the

“fair” price to request from suppliers

17

About the Author

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IHS Pricing & Purchasing Service, a part of the IHS Supply Management solution, delivers

timely, accurate price forecasts and supplier cost analyses, helping companies ensure consistency, increase

visibility and maximize procurement spend. IHS can help you see where prices have been and where they

are going with a database of thousands of price, wage and input cost forecasts and more than 500,000

historic data concepts.

IHS provides a roster of commodity experts and industry analysts to help you:

• Meet and sustain cost savings targets

• Manage price volatility for critical commodities

• Foster agility to maintain profitability

• Understand material input and supplier costs

• Transform procurement from tactical to strategic

• Quantify material inputs and supplier costs

Learn more: www.ihs.com/PricingPurchasing

About IHS IHS (NYSE: IHS) is the leading source of insight, analytics and expertise in critical areas that shape today's

business landscape. Businesses and governments in more than 150 countries around the globe rely on the

comprehensive content, expert independent analysis and flexible delivery methods of IHS to make high-

impact decisions and develop strategies with speed and confidence. IHS has been in business since 1959

and became a publicly traded company on the New York Stock Exchange in 2005. Headquartered in

Englewood, Colorado, USA, IHS is committed to sustainable, profitable growth and employs about 8,800

people in 32 countries around the world.

Research contacts Laura Hodges Director, Pricing & Purchasing

Principal Labor and Construction Analyst

[email protected]

+1.202.481.9237

19

Laura Hodges, Director of the Pricing & Purchasing Service, is

currently responsible for the management and operations of the

pricing research team. She also covers the analysis and forecasts

of global labor and healthcare costs.

Hodges has worked for IHS for more than 15 years. She received

her MA in Health and Labor Economics from Duke University with

the completion of her thesis titled “AFDC, Medicaid and their

Effects on the Labor Supply”. She also received her MBA from

Rutgers University in Beijing, China and her BA in economics from

the George Washington University.

Specialties:

Labor – construction and manufacturing

Research contacts Mark Ulmer Vice President, Pricing & Purchasing

[email protected]

20

Mark Ulmer leads the Pricing & Purchasing service at IHS. This group

specializes in monitoring global commodity, wage, output, and other

related indicators by sector. Their expertise spans across ferrous and

nonferrous metals, machinery and equipment, electronic components,

chemicals, paper, packaging materials, health care, and more.

Ulmer received his Bachelor of Science degree from the State University

of New York at Albany and has authored two articles, which have

appeared in the Monthly Labor Review. He is currently a member of the

Bureau of Labor Statistics Business Research Advisory (BRAC)

Committee.

Specialties:

Supply chain risk, operational risk, market

intelligence, cost benchmarking

Research contacts Katie Tamblin Director, Pricing & Purchasing

[email protected]

+44.203.159.3377

Katie Tamblin is the Director of Supply Chain Solutions, part of the IHS

Operational Excellence and Risk Management Team.

Prior to moving into the solution management team, Katie managed global

labor and European forecasts for the IHS Pricing & Purchasing team. Katie

was lead consultant on a project with the US DoD Inspector General's office

to analyze Bureau of Labor Statistics data and audit data abnormalities,

saving the US Government $520.6 million. In 2012, Katie was named one of

the top 100 people influencing EMS by VentureOutsource.com.

Katie received her Bachelor of Science in Mathematical Economics, Magna

Cum Laude, at Wake Forest University. She received her Master of Policy

degree in International Policy Development at Georgetown University in May

2004. In 2008, she launched the European Pricing & Purchasing forecast

team, and drove the release of the Global Pricing & Purchasing Service in

2010.

Specialties:

Cost & strategic Sourcing, price benchmarks &

indexes, market intelligence, supplier risk