In a cyclical market where prices are going up or down, how do you know when your organisation is getting a good deal from a supplier? The graph (click on the image to view it) shows what happened to one major UK organisation over a six and a half year period as the prices in this particular (major) spend category were going down.
Although the price reduction in June 1997 was significant and below the market average, the ensuing price adjustments left the client in 1999/2000 with worse prices relative to the market average than in 1996. The same could be happening in your organisation, whether prices are moving up (more likely at present) or down.
Alan Low from Purchasing index asks: “If a supplier offers you a year on year a price reduction of 5% you might feel that you have achieved a saving.” ” But what if the norm in the market is a 7% reduction, would you feel the same sense of achievement?”
“How does one measure savings in an inflationary (or deflationary) environment?,” he asks.
“And, if a Strategic Sourcing initiative does succeed in obtaining a reduction in price, how can one be sure that it is sustained over time – especially when compared to where the market is heading?”
“One of the ways to identify savings,” says Low, ” is to know how your prices are doing relative to the rest of the market.””Achieving prices consistently below the market average not only has a significant cash flow impact, but can also prove to your organisation that you are saving money relative to your peers. It also provides procurement with a measurable mechanism to show the company how it is performing,” he says.
In the latest update on PC prices, this principle is illustrated clearly.
PC prices – About to experience a downward cycle?
“PC laptop and desktop prices in South Africa have shown remarkable resilience over the last three years as the Rand has strengthened and weakened against the Euro and US Dollar. With what seems to be a structural correction to the Rand’s value in July 2006, the Rand Euro exchange rate now sits at the same level as it did in January 2003,” says Low.
How will this effect Dell’s local PC prices (Dell supplies local PCs from its factory in Eire)? If nothing else it will put extreme pressure on margins of PCs sourced from Euro countries. Does this give Lenovo (IBM) an opportunity to exploit the market and win back market share through under-cutting its competitors?
If you are buying PCs and want to know how prices will be affected over the ensuing months, contact Alan Low at Purchasing Index (firstname.lastname@example.org).