Price Benchmarking: The most important element of strategic sourcing

Have you done price benchmarking lately?

Are you getting the best price from your suppliers?

If you haven’t conducted a price benchmark, then this question should be keeping you up at night. Humans like to get comfortable. We like to establish routines and then settle into them like a big, plush, La-Z-Boy recliner. This attitude, however, is costing companies and departments money. Instead of examining old contracts and ensuring they’re in line with current market value, we let them roll over automatically until we’re paying Mercedes money for a Hyundai.

The first step in sound strategic sourcing is price benchmarking. At risk of being too blunt, you can’t trust suppliers; you have to have some knowledge of the industry in which you’re purchasing. You have to know the current going rate for whatever product or service you’re in the market for. How else do you negotiate effectively? It’s time to dust off those yellowing contracts.

Is the price right? There’s only one way to know

Price benchmarking is a key component of strategic sourcing. Basically, it compares the price you’re paying for a good or service to the industry average, which is based upon what other suppliers are offering and what your competitors are paying. It’s an obvious and effective way of evaluating the quality of your open contracts.

For many businesses, however, price benchmarking is not a simple task; it requires information that isn’t easy to come by. Your competitors are usually very reluctant to be transparent with the prices they pay for goods and services. It’s also time-consuming and, therefore, expensive to keep track of markets that are constantly in flux or supplier catalogues that change with the weather.

By far, the most efficient form of price benchmarking is using an external service that specialises in the field.

How do I use price benchmarking in my strategic sourcing?

Empower your negotiations

If the price benchmarking exercise indicates you’re paying too much for a product, that doesn’t necessarily mean you should switch supplier. You might have a good relationship with them that’s been nurtured over several years or their product might be superior to that offered elsewhere. In this case, the answer is re-negotiation.

With the data from price benchmarking in hand, it’s time to revisit the negotiation table and discuss a new contract. Armed with current market data, you’ll be in a strong position to reduce spend and draw up a contract that works better for you.

Switch supplier

This is the obvious route. If you include price benchmarking in your strategic sourcing (as you most certainly should) and it indicates you’re paying overs, the best solution could be to look elsewhere. Now is the time to develop a go-to-market strategy based on the data you have from the benchmarking exercise. If, for instance, you choose to run an eAuction, the new information on the value of the product or service will help you shape the parameters of the auction. If you put out an RFQ, you’ll be better able to evaluate the quotes you receive.

From little things, big savings grow

Decades ago, American Airlines removed one olive from each salad served in First Class and saved $40,000. Northwest Airlines saved $500,000 by cutting limes into sixteen pieces instead of ten. These examples aren’t intended to encourage cheapness. Rather, they serve to illustrate how much can be saved when we focus on the small things.

Price benchmarking is typically reserved for high-spend direct materials. That’s fine, so long as it doesn’t distract from the seemingly mundane items common to all organisations. Office supplies are a good example of this. Every person in the business, from the CEO down to the greenest recruit, uses pens, paper and the freeze dried coffee in the kitchenette. These expenses add up, often to a lot more than necessary. How your company manages its spend on office supplies is often seen as a barometer for the perceived overall value of the procurement team.

Yes, there may be big savings lurking in the contracts of your high-spend materials. But don’t discount what you pay for all those BIC pens.

Do you strategic sourcing the right way from the beginning

Do you want to pay more than market value for a product or service? No. Of course you don’t. But that doesn’t change the fact that there’s unlikely to be one procurement department in Australia not paying more than necessary in at least one category.

Category benchmarking has to be the first step in developing sound strategic sourcing. Talk to Purchasing Index today, take advantage of our immense data and experience and arm yourself with the information that will help you negotiate the right price.