The Point of Ideal Price Viability (Graphic Illustrations)

I would like to once again thank everyone for their response to and questions regarding my recent postings on the Point of Ideal Price Viability (PIPV).  Of the e-mails I received pertaining to the Supplemental Material post, many asked me to provide examples of the individual transactions that formed part of the amalgam or averages presented in the PIPV graph (August 8, 2007).

To this end I am happy to provide two such examples with corresponding explanations.  Please keep in mind that these are “individual” transactions in which the low bid price and high bid price were captured at the same point in time and as part of the same event. (Note: to ensure that supplier capability was part of the evaluation process, we leveraged a tool that employed advanced algorithms to qualify competence in key areas such as product quality and delivery performance.)

Example A (MRO Commodity – Dynamic Flux)

Note: To obtain a copy of this graph as well as the complete test result sample send me an e-mail at jhansen@procureinsights.com with “Graph A” in the subject line.

Low Bid Price – $33.60

High Bid Price – $79.97

Graphic Explanation

As you will note by the graph the price has fluctuated dramatically marked by significant drops during the 24 month period it was tracked. This is a normal characteristic of an Indirect Material MRO item such as a spare part.

What Does This Mean?

When a commodity demonstrates a Dynamic Flux characteristic it is ill suited to the centralized contract strategy normally associated with a “static” RFP exercise. This is due to the fact that the steady and significant downward trend means that the veracity of a negotiated price will be irrelevant within a relatively short period of time. (Note: this is one of the main reasons that companies experience contract compliance issues. It is also a reason that more organizations are beginning to research pricing characteristics as a means of measuring true performance.)

In the above instance and without the benefit of knowing the market’s true Floor to Ceiling history, pricing evaluations are usually limited to the narrow scope of the buying company’s own experience (re limited price variability knowledge). And since the majority of RFP exercises and therefore responses are limited to a small representation of the overall (available) supply market, the pricing obtained is usually closer to the market’s ceiling price or higher.

Here is another example:

Example B (MRO Commodity – Dynamic Flux)

Note: To obtain a copy of this graph as well as the complete test result sample send me an e-mail at jhansen@procureinsights.com with “Graph B” in the subject line.

Low Bid Price – $171.38

High Bid Price – $558.66

Graphic Explanation

As you will note by the graph the price has fluctuated dramatically during the 24 month period in which it was tracked.

During the tracking period, the graph illustrates a series of cost spikes that vacillates equally between both the item’s ceiling and floor price. While the timeframe in which the downward trend is more dominant (especially covering the most recent period), there remains a propensity for spikes to occur.

What Does This Mean

Effectively managing the purchasing activity through real-time market access will help to flatten out the cost per unit, enabling the buying company to consistently purchase at or near the Point of Ideal Price Viability (re the range of price reasonableness).

I would like to once again emphasize that the results presented above were not solely based on a price only analyses. The tool that was utilized employed algorithms to incorporate key performance parameters such as quality, delivery capability and other factors such as warranty and payment terms into the metrics.  This meant that an outcome reflecting real-world requirements was consistently achieved.

As before, if you have further questions about the Point of Ideal Price Viability or commodity characteristics, please feel free to contact me at jhansen@procureinsights.com.

Changing Face of Procurement Conference Series 

Jon Hansen is often retained by organizations such as the Purchasing Management Association of Canada (PMAC), the National Institute of Governmental Purchasing (NIGP) and the National Association of Educational Procurement (NAEP) to provide either a 1-Day orientation seminar or 2-Day accredited course based on his award winning Changing Face of Procurement Conference Series.  This 4-Part Series has successfully provided both public and private sector organizations with the insights they have needed to effectively evaluate the viability of their e-procurement strategy (including RFP creation) or alternatively, to drive greater value from an existing e-procurement program.

Also check out his new Dangerous Supply Chain Myths series.

To obtain a seminar outline or to inquire about speaker availability visit our web site by way of the following link; www.procureinsights.com