Cost Insights
by PowerAdvocate

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

Tactical Savings Guide: Supplier Pricing Analysis

March 13, 2015 at 9:38 AM / by PowerAdvocate

This post lays out the details behind a tactical execution of Supplier Pricing Analysis (If you’re not sure what Supplier Pricing Analysis is, check out our high-level intro piece on the subject). Specifically, it outlines:

  • Data requirements: What data do you need access to?
  • Steps of the analysis: What are the steps to follow in running the analysis?
  • Suggestions on execution: How have we seen other companies actually execute and realize the savings opportunities uncovered by the analysis?

Data Requirements

The data requirements to run this analysis are listed below. If you don’t have access to all this data, you are not alone…many E&P companies are in the same boat. We can help – just ask us how.

1. Item-Level Spend Data: As is the case with cost modeling and Price Variance Analysis, item-level spend data is foundational to this analysis. It enables you to identify those items with the largest volume of spend that warrant further investigation around pricing. Using the example of fracking proppant, if you have visibility into item-level spend, then you can view your spend data at the level of granularity laid out below.

 ItemLevelImage

 

2. Accurate Per-Unit Pricing Data: In order to compare pricing across suppliers for relevant items, you need to have access to pricing data. And we’re not talking about what your supplier says they’re charging you, or what’s agreed upon in your contract. We’re talking about actual invoice data which shows the price paid to the supplier for a particular item as part of a particular transaction.

3. Line Item Descriptions: Line item descriptions allow you to confirm that you’re making apples-to-apples comparisons across supplier pricing. Oftentimes, even with item-level data granularity, there are ‘items within items’ that can only be segmented with line descriptions. For instance, within a “Hydrochloric Acid” classification, there might be several different grades of product (see descriptions below), each of which should carry a different price.

 

 SupplierPricingAnalysisLineDescriptions

 

How to Run the Analysis and Identify the Savings Opportunity

With the right data quality, executing this analysis isn’t difficult. Below are the steps required to identify savings opportunities through Supplier Pricing Analysis:

  1. Rank-order your top commodity and stock items (e.g., bulk chemicals) by spend amount.
  2. For each item, export transactional data for the last 4 quarters. Make sure to include the following data fields: total spend, supplier, date, pricing, item description, and basin/region (if you have it).
  3. If necessary, segment the data by item description, grouping descriptions that clearly denote the same items. For instance, because 40/70 Sand items should include a grade component in their descriptions, filtering all of your proppant items by “40/70” will help you isolate this particular ‘item within an item’.
  4. Rank-order any segments you’ve broken out by spend amount. You can further parse segments by region (if you have regional data), or you can instead conduct a Supplier Pricing Analysis that spans all regions.
  5. If multiple suppliers are represented within a given item, you can compare suppliers across pricing. Calculate the average unit price paid per month over the past year for each supplier (adding and populating a “Month” column next to your “Date” column in Excel, and then creating a pivot table, will be helpful here).
  6. Then, graph the results. This should provide a strong visualization of whether or not you are consistently paying a premium with certain suppliers, and how that premium has changed over time.
  7.  Quantify any premiums you pay each month (Difference divided by Lower Per-Unit Price), and average these percentages to see what premium you overpaid throughout the year.
  8. Finally, to discover roughly what that premium cost you, execute the following simple math:

Equation 

How to Execute on the Savings Opportunity

For prioritized savings opportunities, we have seen E&P companies achieve great success in supplier negotiations by bringing the relevant facts and data to the table. In this case, we would recommend showing your supplier the discrepancy in pricing between them and your other supplier(s).

Armed with this information, you are much more likely to drive the maximum amount of savings…which often amount to an incremental 10 – 20%.

 

Need help accessing the data needed for this (and other) analysis?

Need help running the analysis?

Need help executing supplier negotiations?

 

We can help – ask us how.

 

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