Know your Cost Drivers – The Supply Market Intelligence Guide

An intelligent buyer always understands how the prices of your products or services changes according to the supply market conditions. If you want to get the insight about the cost drivers of supply market, you need to read this post till end.

Supply Market Intelligence in the process and result of gathering information about the various factors those influence the supply market. This factors are also known as Cost Drivers.

This can be done internally in our organisation by category experts or can be outsourced to third-party. Many such service providers in modern day are combining market intelligence with technologies like machine learning, data analytics and data visualization.

The major cost driver – Supply & Demand

Supply Market Intelligence mainly include information related to Changes in Supply and Demand and Trends, Supply Market size, utilization, expected expansions/contractions, level of competition, Technological changes, Innovations, geo-political changes in supply market etc.

The relationship between supply and demand greatly influences the prices. Although there are many factors, but in general when supply is poor than demand, prices increase and vice versa.

In general when supply contracts and demand increases, prices increases and vice versa- specially for items involving raw materials or components having high raw material content.

When there are many suppliers in the market for a product or service, buyers are in strong position to negotiate and get better prices from suppliers. For limited number pf suppliers in market pricing may not be that much flexible. Degree of competition are Full and Open, Limited or Technical, and greatly influence the prices.

Merger, Acquisition and break-ups changes the supply market scenario. Whereas merger and acquisition reduces competition in the market resulting in price increases. Break-ups can increase the competition by increasing the number of suppliers in market. To control this many government review Mergers and acquisitions to tackle Antitrust issues.

Supply Chain Impact – Mergers and Acquisitions

Mergers & Acquisitions 2020 | India

Market Capacity as a Cost Driver

Excess capacity of production at producers drives the prices down in market. For new product, capacity contract at producers –pushes prices upward. In rapid sales growth, capacity utilisation increase, which in turn also increases prices, whereas producers per unit cost decrease due to learning curve.

New technologies make old technologies obsolete. So when new technologies arrive old technologies may be available at discounted rates. Sectors where rapid technological changes are there, supply market also changes rapidly.

Government regulation affects the supply market greatly. Like rebates, special schemes can change the supply market scenario. Procurement professionals must keep in watch the government regulations and changes very closely.

To make Market Intelligence more useful, procurement professionals need to understand beyond what has happened in past. We need to have an understand of what might happen, something called predictive analysis. A SWOT like forward looking approach can help us to understand the strength, weakness, opportunity and threat based on internal and external supply make data.

Supply market intelligence data can be collected from many sources like RFI itself, suppliers company website, news articles, company press releases, industry magazines and government publications etc.

GEP – SUPPLY MARKET INTELLIGENCE

Conclusion

How the supply market positioning and structure effects the prices of the product can be summarized to a great extend in following points-

  1. Supply Contact Demand Increases consequently Prices Increases.
  2. Many Supplier in Market will give the buyer higher pricing flexibility hence lower prices of the product or services.
  3. Less Supplier in Market will result in less pricing flexibility hence the buyer needs to pay higher prices for the product or services.
  4. Excess Capacity in industry drives prices down
  5. New product launch with premium prices
  6. Rapid sales growth reduces capacity of the suppliers thus increasing prices
  7. More supplier in market means more capacity utilization thus prices of the product or services decreases.
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