This article suggests a practical procurement case from the infrastructure company (e.g., water transmission and distribution.)
One of their top-spend items is a high-density polyethylene (HDPE) water Pipe.
Let's look closer at the sourcing strategy for this category.
HDPE pipe sourcing strategy
Suppose you analyzed all the "usual suspects": unit price, delivery terms, and payment.
Is there anything else we need to look at?
However, the relationship can be more complex due to feedstock flexibility (polyethylene can also be produced from natural gas liquids,) currency rates, and market dynamics.
As per the following Beroe analysis, "the polyethylene price index had some correlation with WTI prices, albeit a weak one." You cannot simply prorate the P.E. cost to crude oil one; many more factors are there to consider:
- supply (e.g., the U.S. market restricted supplies from the Middle East, where the P.E. production facilities are abundant)
- demand (e.g., stagnating economies in Europe don't generate higher demand)
- currency (e.g., a weak or strong dollar, local inflation affecting the manpower cost)
- logistics (e.g., price of imported P.E. products or ethylene.)
Category managers and analysts must consider all those factors to develop a balanced sourcing strategy.
Local logistical costs of HDPE pipes
Let's also consider one more HDPE cost-related factor - local logistics.
The standard form factor is a 12m HDPE pipe.
However, smaller-diameter HDPE pipes can be produced in rolls of 100m.
So, if you want to order 10,000m of 110mm HDPE pipe, it will take 3 trailers, each with 300 12-meter pipes on 50 pallets. It may also take 7 trailers with 16 rolls per trailer.
100-meter rolls cost approximately 6% more than loose pipes due to the production complexity and nearly 2,5 times more in local logistics.
The internal logistical cost will also be higher for rolls, which will take more warehouse space and require complex handling equipment.
On the flip side, if your contractor needs to connect a house to the water central with a 50-meter section, they must weld 4 pipes instead of simply cutting off half of the roll. You should factor in the cost of welding and a drastically higher risk of water leakage.
We also missed a smaller piece of analysis. 16 rolls = 1600m, so for a 10,000m order, you would need 6,25 trailers, i.e., one trailer will drive more than half-idle.
Therefore, consider changing the single order volume to 9600m. This corresponds to a saving of 0.2% of the total order cost. Penny saved is a penny earned.
Category management lifebuoy
All of the above is meant to prove the importance of category management.
HDPE pipes aren't the most sophisticated category, yet requiring a good knowledge of commodity markets, logistics, fundamental economical analysis, industry working practices, and many more.
If your company keeps negotiating unit prices, they need a category management lifebuoy.
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