IHS Global Insight: Pricing & Purchasing

The IHS Global Insight Pricing and Purchasing Service provides timely, accurate cost and price analysis that helps corporations and government agencies better manage supplier relationships, assess supplier quotes and negotiate long-term contracts.

The service includes 10-year forecasts for up to 1,300 prices and wages, as well as access to thousands of historic price and wage series from around the globe.

Armed with a better understanding of suppliers' cost structures and market dynamics, clients can negotiate prices effectively, reducing supply chain costs and boosting the bottom line.

Benefits:

Pricing and Purchasing Service help customers with:

• Contracting
  • Negotiate contract escalation clauses
  • Determine which index will serve you best over the life of a contract
  • Build composite cost indexes for contract management
• Purchasing
  • Evaluate subcontractor and supplier price quotes
  • Benchmark costs accurately
  • Pinpoint the best times to make key purchases
  • Manage your supply chain more effectively and quantify diversified spending patterns
  • Build composite cost indexes
  • Perform margin analysis on supplier industries
  • Check the competitiveness of a supplier's price
  • Populate customised business-unit or product-line reports
• Cost Estimation
  • Determine whether a new project is worth pursuing
  • Calculate project costs over the life of a project
  • Evaluate project risk relative to labour and material shortages

Premium Pricing and Purchasing Service provides 10-year forecasts for up to 1,300 commodities from around the globe. The package includes data, analysis and access to our team of experts. Purchasing professionals, contract managers and cost estimators for long-term capital projects have all reaped cost savings from applying the pricing and purchasing service insights to their business processes.

Components include:

Publications

• Commodity Price Watch
  Analysis of price changes and the fundamentals driving key costs, updated monthly.
• Supply Manager
  Quarterly projections for over 500 U.S. prices and wages. This publication also presents the pricing outlook for the commodities and materials that companies are buying and focuses more on the key drivers that impact on material prices. Therefore, it is crucial for departments with slightly shorter planning horizons, such as purchasing.
• Cost Planner
  Thorough market insights, including quarterly three-year projections and 10-year annual forecasts for over 900 global prices and wages. It also contains sector overviews for our ten major industrial areas: energy, labour, steel, nonferrous metals, chemicals, construction materials, electronic components, machinery, transportation services and packaging.
• Capital Cost Planner
  Provides detailed long-term market perspectives, including demand, prices, supply and capacity issues for key capital project expense items. Narratives include basic assumptions, market drivers and forecast risks for core commodities, allowing for more effective risk management.

Software

• The Cost Analyzer, via DataInsight-Web
  The Cost Analyzer is a web-based wizard that allows clients to perform customised cost analysis. Cost Analyzer provides history and forecasts for commodity prices and wages, analyses a single material buy, breaks down your supply chain into commodities that can be analysed individually and allows you to understand whether your supplier's price is reasonable and why.
• The Purchasing Analyzer, via DataInsight-Web
  The Purchasing Analyzer is a web-based wizard that allows clients to review margins by industry. This tool showcases input cost breakdowns of labour, materials and energy by commodity type, equipping clients with the tools necessary to negotiate effectively.

Data Tables:
All tables are updated quarterly

• Short-term cost tables
• International cost tables
• European forecast tables
• Capital cost planner tables

Concept Coverage

Key commodity areas include:

• Energy products
• Chemicals
• Steel
• Non-ferrous metals
• Industrial machinery and equipment
• Electronic components
• Paper and packaging
• Transportation
• Building materials

Frequency and Horizon:

• 10-year forecast horizon
• Quarterly data
• Monthly forecast updates for key spot prices and quarterly forecast updates for all others
• Historical Data vary and are available back to the early 1900s in some cases

Historic Data Sources:

• BLS
• ONS
• DARES
• Eurostat
• Stats Canada
• Statistiches Bundesamt
• INEGI
• SBB
• Purchasing Magazine
• Australian Bureau of Statistics
• NBS
• Instituto Nazionale di Statistica
• Bank of Japan
• Nihon Keizai Shimbunsha
• Ministry of Commerce, India
• National Statistical Office, Thailand

Related Historical Data available for Purchase
Global labour, demographic data and producer price indices dating as far back as 1944 including:

• Commodity price indices
• Competitiveness indicator
• Industrial production: total, manufacturing, mining, services
• Labour market: compensation rates, wages, salaries, employment figures by economic activity, costs and productivity by sector
• National accounts, income approach
• Population statistics by demographics and age
• Price indices: consumer, producer and wholesale by sector
• Wholesale trade and retail sales

Pricing and Purchasing Expertise

For more than 30 years, our expert team has provided an independent, fact-based view of the world's industries and the factors determining prices. We have over 325 economists and analysts worldwide who support the service with expertise in over 180 industries and 200 countries.

IHS Global Insight products are leaders in economic and financial analysis, forecasting and market intelligence, backed by more than 40 years' experience and an outstanding record for accuracy.

Testimonials

"Good in-depth analysis on hot issues"

"User-friendly and does not take a lot of time [to] find information needed"

"The Webinars that covered the recession and economic recovery have proved to be very insightful"

"You can always be 100% confident of data"

"Outstanding customer service and responsiveness"

"Providing forecast data where others fear to tread"

"Accurate and dependable commodity indexes"

Pricing and Purchasing Case Studies

Case Study: Chemical Company Maximizes Procurement Cost Savings

Situation:
A chemical company was looking to unlock cost savings in their supply chain.

What We Did:
IHS Global Insight provided the tools and data for the company to build a composite index of their spend. Armed with this information, the user went to the market asking for a reset on price.

Cost Saving Outcome:
The user saved $8 million, approximately 10% of spend for the category.

Case Study: Building Materials Manufacturer Saves on Aluminium

Situation:
A building materials manufacturer saved at least 10-15% on aluminium purchases by delaying a contract based on IHS Global Insight forecasts.

What We Did:
Our expert, John Mothersole, accurately predicted a significant unwinding of aluminium prices in 2009. The client, armed with that forecast, floated aluminium purchases on the spot market for a few months before locking in a contract price at 10-15% lower.

Cost Saving Outcome:
A building materials manufacturer in Europe saved 10-15% on aluminium purchases in 2009.

Case Study: Steel Cost Savings
Prices for hot-rolled sheet peaked in the third quarter of 2008. In the first-quarter 2008 forecast, we predicted a third-quarter peak and forecasted fourth-quarter prices at $637/short ton. Our smallest clients buying from mills would typically procure at least 48,000 tons per year. A buyer choosing to float the price on a 48,000-ton contract delivered over the following four quarters would have saved $24.7 million* over a client who locked in a contract price at the peak, saving half the contract value.
* Based on locking in the price in July 2008 at $1,032 for delivery at 12,000 tons per quarter over the next four quarters.

Cost Saving Outcome:
A typical steel-buying company could have saved $24.7 million on a year's worth of steel if they had the service.

Case Study: Time-Sensitive Polyethylene Buy Decision

The Situation:
This case study comes from a leading shipping company and involved a major buy decision for polyethylene (PE). The client wanted a consultation in the autumn of 2003 regarding the latest trends in PE availability and pricing. He was trying to estimate the cost of PE for several potential projects that would require buying 10,000,000 pounds of PE during 2004. More importantly, the client wanted to time his purchases to take advantage of the lowest pricing point projected for the next 12 months.

What We Did:
After discussing the issue with the client, Frantz Price, an IHS Global Insight petrochemical analyst, advised him to make the entire purchase right away in order to lock in current market prices. Price anticipated that PE prices would surge virtually non-stop in 2004 based on strengthening demand, tight supply and soaring energy input costs. The client followed his advice. PE prices skyrocketed throughout 2004, and the client saved his organisation nearly $1 million.

Cost Saving Outcome:
The client saved $1 million on their polyethylene buy!

Case Study: Motor Price Negotiation

The Situation:
The client manufactures recreational boats and other water sport equipment. They buy engines from automobile manufacturers, using the engines as power plants for inboard and inboard/outboard motors.

What We Did:
IHS Global Insight data showed that the price of motors, as measured by PPI3714201NS, had been declining fairly continuously since 1992. Furthermore, we forecasted the decline to continue for the next several years. The client confronted its supplier with this information, along with our forecast of flat or declining prices for engine components, to document a lack of underlying cost pressure. The bottom line: the client won a [grudging] break in contract price for engines, resulting in a $2.2-million saving.

Cost Saving Outcome:
The client saved $2.2 million on one equipment contract negotiation.

Case Study: Cost Benchmarking

The Situation:
As part of a company-wide cost-containment initiative, the Pricing and Purchasing (P&P) Service staff was asked by a global electronics company to assist its purchasing department in developing a formal cost-benchmarking model. The project involved assembling a model that tracked and forecasted material cost inflation by commodity, equipment component or service.

In the first stage of the project, our staff and the company's purchasing department analysed the company's material purchases. Over 300 separate "buys" were identified for which procurement data was maintained internally. Each buy was assigned an escalation measure - either an actual market price or a price or cost index. The second stage of the project involved developing forecasting models for each assigned price measure.

The final model yielded escalation measures - both historical and forecast - against which the company's own data was compared. This exercise provided an objective third-party benchmark of the purchasing department's performance in managing cost inflation. After an initial period of evaluation, the model is now used as a strategic tool to establish performance targets for the company's purchasing managers.

The net result is that, as part of a broader Best Cost Producer strategy, the benchmarking model has helped achieve substantial cost savings in materials procurement. In 1997 alone, the client estimated $60 million in cost savings!

Cost Saving Outcome:
The client saved $60 million using the service for cost benchmarking!

Case Study: Custom Audit

The Situation:
IHS Global Insight has a long history supporting the aerospace and defence industry. Price forecasts are employed in long-term contracting between the US government and private parties via economic price adjustment (EPA) clauses. These projected costs are adjusted every year based on the actual data reported by the US Bureau of Labor Statistics (BLS). One series that heavily relied upon by the US government and aircraft manufacturers is the employment cost index (ECI) for total compensation in aircraft manufacturing. This series is used in countless contracts, and in the mid-2000s, volatility in the series wreaked havoc on EPA calculations.

Boeing made pension contributions of $8.0 billion between 2002 and 2005 and reported these to the BLS. The pension cost Boeing incurred during the time under CAS accounting standards was only $1.1 billion, however. Therefore, $6.9 billion of the pension funding reported was a pre-payment credit, and not a change to compensation of employees. The BLS, however, counted the $8.0 billion in contributions in their estimations of the cost to employers of having employees, rather than the $1.1 billion. Therefore, the ECI for "Compensation, Aircraft Manufacturing" registered wild spikes periodically from 2003 to 2006. These spikes were not, in fact, a reflection of changes in compensation for workers, but changes in the funding of pension trusts. Therefore, the ECI was not reflective of compensation at this time. Because the series was used in so many contracts, the US government found itself beholden to major payouts based on the change – in many cases, to Boeing itself.

What We Did:
With the assistance of IHS Global Insight, the US Department of Defense Inspector General's (DoD IG) office was able to estimate what the true changes to compensation were in 2005 and 2006, excluding the pre-payment pension credits reported by Boeing. IHS Global Insight provided new projections of compensation changes going forward based on these estimations. The DoD IG's office then recalculated contract adjustments with Boeing for the Air Force C-17, the Navy F/A 18 E/F, and the Army Apache Longbow using the estimated series. As a result, the US government avoided significant costs that would have been incurred based on the ECI as reported by BLS. In the wake of the adjustment, Claude Kicklighter, of the DoD IG's office offered his sincere thanks to IHS Global Insight, saying, "[b]ecause of your support, we were able to calculate price adjustments on the multi-year contracts that were significantly less than those based on the improperly inflated aircraft manufacturing index and we were able to avoid a cost of $520.6 million for DoD and the taxpayers."

Cost Saving Outcome:
IHS Global Insight played a vital role in ensuring proper contract adjustments and enormous cost savings for the US Department of Defense.

With IHS Global Insight's help, the US Department of Defense and US taxpayers saved $520.6 million!

Case Study: Correctly Specifying a Contract Escalator Clause

The client, a truck manufacturer, used the Cost Analyser to help negotiate a long-term contract with a supplier valued at $2.5 million. The key point of negotiation was the long-term escalator clause. The supplier wished to use an index that posted a 2.5% long-term escalation rate. Using the Analyser, the client identified a commodity index that matched the material buy but showed a long-term escalation rate of just 1.4%. When confronted with this [more appropriate] escalator, the supplier conceded the lower escalation rate, saving the truck manufacturer an estimated $2.2 million over the life of the contract. The savings realised were gained over three separate delivery dates, with the savings estimated for each phase of the contract being $1,057,000, $436,000, and $741,000.

Client Cost Saving Outcome:
The client saved over $2 million by identifying the right series for their escalator clause!

Case Study: Margin Analysis

The Situation:
The purchasing manager of a mid-Atlantic ready-mix concrete maker asked our Pricing and Purchasing (P&P) staff if we could provide insights into recent, aggressive price moves by cement makers. By way of background, Portland cement prices had risen some 38% from 1993 to 1998. The manager was fully aware of the industry's recent history, but needed harder documentation in a report to senior management.

The P&P price forecasting model for hydraulic (Portland) cement, like all of our price forecasting equations, attempts to break down price escalation into its constituent elements. Price escalation is a function of many factors, but broadly speaking, it can be divided into two principal factors: input costs and end-market activity.

What We Did:
In assisting the purchasing manager, our staff analysed the cement industry in the context of our price forecasting model's structure. Most importantly, recorded escalation in measured input costs was contrasted with cement price escalation from 1980 to the present. This revealed that during the 1980s, prices grew only 14% while underlying input costs jumped over 40%. Although the industry did enjoy [average] productivity growth over this span, this differential in cost and price escalation implied significant erosion in cement maker's margins. Earnings data for the industry help to confirm this analysis.

Cost Saving Outcome:
Placed in this context, the cement price growth observed since 1990 has in large part been an attempt by cement makers, enjoying healthy shipment growth, to restore margins. This was again confirmed by the P&P price model, which noted a cumulative price increase of 38% since 1993, compared to production cost increases of 15%. Summarised in a brief report, this information was forwarded to senior management.

Case Study: Electrical Equipment Negotiation

The client, an electrical equipment manufacturer, needed to purchase small electrical engines to power the machinery it sells. We forecasted that prices for such motors would barely increase during the client's fiscal year. The internal buyer was upset by this projection, and during a conference call with his manager said [our forecast] was an unfair standard to hold him to. He had accepted a 5% increase in the previous year's contract, and felt the increase of less than 1% implied by the IHS Global Insight forecast in the current contract period was impossible.

What We Did:
The Pricing and Purchasing analyst showed that in the coming year there was little increase expected in prices for steel, copper, aluminium and brushings, the major inputs in motor production. The analyst then provided data showing that in the prior year, the nationwide producer price index for small motors had actually declined slightly. The client's buyer, when confronted with this information, challenged his supplier's requested price increase. The supplier, over the course of subsequent negotiations, conceded to the client's position, and no price increase was paid.

Case Study: Truck Windshield Quotation Analysis

Situation:
The client, a truck manufacturer, put out to bid a windshield glass buy and received three quotes from suppliers. Two quotes came in with an 8.0% increase, and the third with a 3.5% increase. One of the suppliers cited labour costs as the reason behind the price increase. The client felt all three quotes were high and asked IHS Global Insight to help validate the proposed increases.

What We Did:
Our Pricing and Purchasing (P&P) staff analysed recent price movements in a wide range of glass products, from raw flat glass down to laminated and tempered glass for automotive uses. In no instance were we able to document a price increase greater than 4.0% over the previous year.. For most of the products reviewed, in fact, prices had remained flat or had actually fallen during the previous three years.

Given the discrepancy between our analysis and the conditions cited by our client's suppliers, we also examined raw material costs for the glass industry. Again, measured price change in three key areas showed either flat of declining prices during the previous year and a half.

Finally, because labour costs represent roughly 40% of glass production costs, and because labour cost increases were referenced specifically by one supplier as the reason for the requested price increase, P&P looked at labour market conditions in the industry. We were able to document wage pressures that had produced annual wage increases in the 4.0-8.0% range over the previous year. On closer examination, we discovered that overtime payments were responsible for much of the recent rise in wages, and believed the high overtime levels were not sustainable.

Client's Cost Saving Outcome:
Our client was able to use this information to challenge the requested price increase. The net result was that the manufacturer and its suppliers initiated a programme as part of a broader supply chain management initiative. The manufacturer is working to share information with its suppliers as part of a long-term relationship, the ultimate goal of which is controlling cost increases.

Case Study: Poorly Specified

The Situation:
A diversified equipment manufacturer, acting as the general manager in a power project, negotiated the purchase of copper tube bundles for the plant's heat exchanger. The tube supplier insisted on using the consumer price index (CPI) in the contract escalation clause determining the forward delivery price.

Since the CPI measures the market basket of goods and services purchased by a typical consumer, and not conditions in the volatile copper market, both parties exposed themselves to significant price risk in the escalator clause.

While the tube bundles were being manufactured, copper prices rose dramatically. With the CPI as the adjustment mechanism in the contract allowing for only a fraction of the copper price increase to be passed through, the tube maker realised a significant loss on delivery. Even worse, the unfavourable terms of the contract provided no incentive for the tube maker to deliver the tube bundles in a timely fashion. Delivery was delayed, causing the entire project to fall behind schedule.

Ironically, the tube bundles were found to be damaged on delivery (the fault of the shipper) and had to be disposed of as scrap by the buyer. The only saving grace in this episode was that scrap prices had followed primary copper prices, and also risen dramatically. The final realised price for the damaged tube bundles still allowed the client to dispose of the damaged bundles at a profit, although the project fell even further behind the original schedule.

Case Study: Time-Sensitive Steel Buy Decision

The Situation
This case study came from one of the largest steel producers. This company wanted a long-term outlook for steel prospects in Central Europe that would guide their investment decisions in the region. The study was to examine both supply and demand for steel produced in the Czech Republic, Hungary, Poland and Slovakia.

What We Did:
The study approached the company's needs from each direction. On the supply side, detailed outlooks were prepared for prices and availability of materials to make steel, including coal, ore, scrap and natural gas. Special attention was paid to disparities that would affect the selected region compared to the rest of the world.

The demand outlook examined internal demand from the four countries, as well as other Central European nations. Economic growth, the health of manufacturing, and the need for new construction were factored in. Furthermore, the potential for export to Western Europe, Asia and North America was explored, along with competition from Ukraine, Russia, and other low-cost competitors from the former Soviet Union.

The report allowed the client to have an independent voice when formulating its business plan. IHS Global Insight's conclusions were compared with the company's internal outlook, and differences were discussed in depth at a meeting between company management and analysts from IHS Global Insight. The study was an integral part of developing the steel company's long-range business plan. The reconciliation of this study with the company's own internal outlook led to a series of favourable investment decisions by the company in Central Europe.

Case Study: IHS Global Insight's client-specific outlook helped avoid excess inventories, saving millions!

The Situation:
Our steel service director presented to a steelmaker's production group in September 2008 as they were setting their 2009 fiscal year budgets. After a great 2008, the group was very upbeat and anticipated continued high output and profits for the subsequent year. In our analysis, we examined each major end-market the company served and IHS Global Insight's projections for the coming year. We then translated the outlook into ramifications for steel by product type (construction on rebar, heavy machinery on plate, etc.). Our uniformly gloomy outlooks (even before Lehman Brothers collapsed) signalled that the company would need to curtail production amid falling prices.

Following our presentation, the audience was dead silent. When asked if the presentation was of any assistance, the chief operating officer answered, "It was extremely valuable, but you just kicked the bottom out of all our plans for the coming year."

Cost Saving Outcome:
In mid-2009, we reconvened with some members of the same planning team. They said that while our outlook was tough to hear, it forced them to rethink their plans and helped avoid excess inventories, saving millions!

To learn more about the IHS Global Insight: Pricing & Purchasing solutions, please download one of the following:

Whitepapers

• Commodity Volatility - Dec 2011

Product Brochures

• Pricing and Purchasing Service for Corporations
• Pricing and Purchasing Service for Government Agencies