Rising Interest Rates: Maybe It’s Time to Bring Back the Forgotten Art of Price Analysis
Price analysis is a subject that is often overlooked in supply chain education, (although it is certainly a big part of our chapter on Strategic Cost Management in Purchasing and Supply Chain Management). This is perhaps a “forgotten art” that was revisited by one of our student teams that worked with the American Red Cross to explore this topic further this semester. The issue is particularly important, given the massive inflation rates we have seen, and the Fed’s decision to raise rates today. (By the way, don’t forget that I told you inflation was coming on strong, back in June 2021! The Fed didn’t listen to supply chain guys back then…)
In an effort to incorporate organizational best practices in the scope of price analysis, the project team James Schott, Kevin Jones, and Delshad Zaker worked with Tom Nash and Red Cross to identify practices, processes and structures within organizations for a price analysis function or group. The team conducted multiple interviews, and surprisingly, none of the organizations they met with confirmed the existence of a Price Analysis Group within their organization, but many discussed similar groups and processes in place that take on similar tasks and procedures dealing with price analysis and compliance. The team thanks the executives from Gilead Science, MetLife, Altria, VF, CAPS, The Hackett Group, Sonoco, and Lenovo who participated in the interviews.
Suppliers are often able to raise prices, and do so without warning, particularly in this environment. Although the team heard varying information regarding the core issues described, every single individual interviewed acknowledged that a dedicated group focusing on price analysis methods would be very beneficial to their organization and effective in promoting improved practices. One executive noted that throughout his career, procurement organizations he has led or been a part of lacked a team or group of people whose focus and core competency was on optimizing price and spend visibility, supplier utilization and contract compliance. Another leading executive called the group a “no brainer”, and she noted that the level of non-compliance in contract alignment and spending by onboarded suppliers is not visible to the team due to a lack of focus or a dedicated team. None of the leaders we spoke to could provide the team with figures around excess costs that were incurred related to the issues described. All admitted that if an analysis was done the numbers would warrant or justify a focus on the key topic areas of onboarded supplier compliance, contract pricing compliance, and fair and reasonable market analysis. All agreed that establishing a group to oversee these types of activities would be beneficial, stating that the cost of implementing a proposed group would far outweigh the non-compliance costs organizations would incur.
Several executives mentioned the possibility of forming a procurement “center of excellence” as a group that addresses the efficiency of how a procurement team functioned, including the establishment of price analysis activities. One executive described this group’s key activities as including managing pricing agreements with software and tools, building and maintaining supplier price catalogs, rate cards for category management and requesters within the broader organization. Another CPO referenced a procurement analyst team that took on some of the price analysis work being described, and she noted that “This kind of price compliance work is administrative and analytical which is why our procurement analytics team does it. Even if the category manager had time to do it, I want them to be more strategic in their focus.”
When discussing price analysis activities post-transaction, many of the individuals interviewed classified these as traditionally audit activities but added these processes could fall under the guise of a Price Analysis Group. One executive said on this topic “In lieu of focusing on terms like “audit” when establishing the group, align to titling the group as a “continuous improvement team”, “root cause analysis group” or “center of excellence” to avoid the connotation that can come from the negative perceptions of audit within an organization.”
Whatever you want to call it, Price Analysis is an activity that is well worth conducting. Several of our other student teams who presented at the Gallery Walk last week developed some highly sophisticated price analysis tools, including some that benchmarking material cost indices, established price inflation drivers, and developed modeling scenarios to understand how transportation costs will behave in the future. Maybe Price Analysis’s time has returned!