Cost Insights
by PowerAdvocate

Intelligence for energy companies seeking a data-driven approach to cost management

Price Tracking Analysis: The Simplest Route to Savings

September 28, 2015 at 5:41 PM / by PowerAdvocate

Smart_Savings

In this week’s post – the 10th and final installment of our Smart Savings Series – we’ll cover Price Tracking Analysis, a method for quickly revealing unit price movements over time for high-spend items. Determining how your prices have fluctuated over the last year will help you identify areas where suppliers have failed to pass on cost declines. While price tracking may sound like an obvious best practice, it’s one that most E&P firms don’t regularly engage in, despite its capacity to uncover tens of millions of dollars in savings opportunities.

How Do I Execute the Analysis?

With the right data, executing this analysis should be a straightforward, speedy process. You simply need to export transactional data from the last four quarters, sort your line descriptions by spend, and chart top descriptions’ unit pricing over time. A sample output for one of your items would look something like this:

Smart Savings

If these charts represented pricing for your high-spend casing line descriptions, you would likely be able to drive meaningful savings with “Supplier A,” given that steel, labor, and other casing input costs declined over this period while your pricing remained stagnant. However, maximizing these savings would be difficult without knowing exactly how much casing prices should have dropped. Furthermore, were these charts referencing an item with less intuitive pricing trends, it would be hard to know whether your pricing should have declined at all.

So, how can you quantify the difference between your pricing trends and the market’s pricing trends? You need cost models and a should-cost tool!

The Should-Cost Advantage

With accurate, granular cost models that inform a should-cost tool for the items you buy, Price Tracking Analysis becomes far more sophisticated and actionable (see sample output below). With the ability to quantify the discrepancy between what you paid, or currently pay, and what you should be paying, you’ll can make highly specific, data-backed requests of your suppliers, and ensure your pricing tracks the market moving forward.

Casing vs. Should-Cost

What are the Data Requirements for this Analysis?

In order to conduct this analysis, you need access to just five data fields at the transaction level:

  1.        Decipherable line descriptions
  1.        Supplier names
  1.        Unit prices (or quantities and spend amounts to derive unit prices)
  1.        Units of measure
  1.        Dates

Without any one these fields, you cannot determine how a supplier’s pricing for any given item has moved over time. We often find that non-purchase-order transactions are missing some or all of the data within these fields. Thus, if your organization buys most materials and services off-PO, you should likely focus efforts on driving your spend on-PO and on-contract before conducting Price Tracking Analysis.

Curious to learn more about Price Tracking Analysis or cost modeling and should-cost analysis? Just reach out, and we’ll connect you with our Energy Intelligence Group.

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