I love technical staff. Engineers, architects. Who doesn’t, right? But procurement has always had special relationships with engineering. Sometimes it goes all wrong, but sometimes – the other way around. Working together can bring benefits where nobody expects them. This blog is about one of such occasions: finding standard pieces in bespoke piece of equipment and benchmarking the margin that the main contractor is making.

Reducing costs and leaning supply chains is a challenge not only for procurement department. Technical department, logistics, operations – everyone is under pressure.

CAPEX is always one of the most difficult categories due to complexity of the projects and people involved. It is difficult to benchmark the price of the equipment if it is bespoke:

• If it is somewhat standard, you can try to find some information from your colleagues, working in other markets.
• You can always go for “material weight value” strategy and negotiate hard.
• Another option – google. Google will tell you “market standard” markups and profits (only due to the quantity of information it is up to you to decide if you want to believe 12%, 6%, 3%, 0,5% or “cost only” margins – there are no “standards”), which, again, you can use for negotiations.
• “Should cost” model. Be ready for good sales people in engineering / constructions companies. If you choose to push them for “costs only” pricing model and reduce their prices, motivating with “being overcharged”, prepare for a push back. They will ask you, what do you think “real cost” is. Therefore, studying cost models will give you better understanding of true costs AND will keep all your arguments within reach.
• Decomposition. I used this one recently and had quite good results – please read on below.

It is rarely a case, that the main supplier (contractor) will manufacture all bits and pieces that go into the fully assembled unit. And the items, that they will use – surprise! – are very often standard. If you can get hold of the item breakdown list and price against items that were not manufactured by main assembler, you can have insights into their general pricing policy. An example follows below.

During one of the brainstorming session with technical department we were discussing everything that came to our minds. Suppliers, types and categories of spend, purchasing and contract renewal calendars, people and processes. And we found some repeating names. Conveyor system supplier was buying belts from the same belt manufacturer that we also had as a strategic supplier. We asked conveyor system supplier to work with us to find some improvements in supply chain for that piece of CAPEX equipment. When you get replies, that “managing director is uncomfortable and fears to damage relationships”, you realise – there is more to this than just that. At the end, this exercise brought us better control and visibility and… 20% savings – after negotiating down from initially required 25%.

Thank you for reading – if you are still here. Please do share / comment if you liked it or would like to know more.