Right, for the manufacturers, logicians, and accountants of the LR…could use some help figuring out how to handle pricing some stuff from my supply chain.
I make a kit of parts for a customer from raw material, and it’s comprised of parts made from several different sheets of material (let’s just say they’re $500/sheet)
Of course, it’s a little more complex than that…I make about 20 kits from 30 different sheets of material, but I don’t believe that should change the basic approach
I have this raw material on consignment from Supplier 1 (I don’t pay for the material until I use it)
I have to notify my customer of any changes in the price of the kit
The price I pay my supplier changes quarterly as they bring new stock in and pay current market rates for it ($500 → $510)
Since I don’t own the material until I use it, my current situation is pretty easy, kit costs $2000 this quarter and $2050 next quarter when supplier price changes
BUT
I lose sleep over having all my eggs in one basket, and diversity of a supply chain is of course important
So if I introduce Supplier 2, their price to me for that raw material is different than for Supplier 1 ($480)
And Supplier 2 may update their prices on a different interval than S1 (S1 $500 in december, $510 in february, S2 $480 in january, $490 in march)
How do I price the kit for my customer based on differing prices for this sheet from multiple suppliers?
It would be a PITA but doable to force a certain mix of consumption from S1 and S2 if that helps to constrain the problem.
How would the answer change if I owned the sheets outright instead of paying as I go?
I imagine this is elementary for anyone accustomed to running complex supply chains, but anything I come up with feels like I’m just inventing it out of thin air, no idea what standard practices are.
Thanks in advance for guidance/tips/tricks/links/etc.
In short, yes, the material component is contractually agreed to be cost plus margin, and material for these products overwhelms all other components of the price (processing, labor, etc.).
Yeah, some sort of averaging seems prudent, and I assume that there are standard methods for this, just unbeknownst to me. The mix of qtys. of Sheet A from Supplier 1 and from Supplier 2 certainly has to weight that average though, hence my comment about forcing some known mix of consumption between the 2 (or >1, as we’re not strictly limited to 2).
Right. Wouldn’t the following formula do it?. And you wouldn’t have be constrained to force yourself to use the same fixed mix of sheets from your suppliers all the time. Just use what you need from whom.
Price of kit ‘a’ = (#of sheets used from Supplier x) + (#of sheets used from Supplier y) . . . . + (#of sheets usef from Supplier z)
where (#of sheets used from Supplier x) is the average cost that quarter.
Do this for however many suppliers you use for the type of kit. Or instead of the average, use a maximum (so you never lose money, and price it high enough to cover suppliers raising prices at the time of use).
Do the above for any of your 20 kits - one equation per kit.
You can use a weighted average price from the 2 supplies and should be ok. Not sure what the material your getting in sheets is? If it’s a non ferrous metal then you can also index it to something like Platts which publishes monthly for price adjustments. Keep in mind your distributor is buying in larger quantities and holding it on their books so you could also work something out with them on an index as well. Likely they are already doing this.
Lastly you could go and push payment terms with your supplier in order to free up cash flow but a consignment model is pretty good for that already assuming you bring onto your books, ship and bill inside those type of windows.
I am a supply chain guy mostly on machined components but have been around a lot of commodities over the last 20 years or so. Would need to understand more details in order to come up with better advice/solutions but there are lots of levers to pull. Ultimately its all about cash flow and maintaining your margins.
It sounds like you may be trying to manage risks with a dual source option. Is that the case? Thats a little different conversation and not always cost focused.
Thanks for chiming in again; appreciate your bandwidth. I think the gotcha there is that I don’t know ahead of time how many of kit A I’m making in a quarter, nor how many sheets from each supplier I’ll use (or even have in-house to have the ability to use).
Stainless steel, about 150T/yr split across 316 and 304, and 30ish different SKUs representing grade, thickness, and sheet size. SS has thankfully been pretty stable after all the nickel kerfuffle at the start of the Ukraine war settled down.
Very happy with consignment model as it prevents me from owning all that stock. Although for better or for worse, my consignment bill is due the month -after- I get paid by my customer, so there’s a phase misalignment that creates the occasional pucker.
Yes. Some of the sheet SKUs are 5mos leadtime and if those run dry I’m up a certain creek without a paddle.
Eager for any other thoughts you might have; appreciate your insight.
You could also ask your customer/s for a forecast for planning purposes only. Many companies will provide that and it would help you in planning your consumption of raw.
You can also use Kitco Metals or London Metals Exchange for market info on raw. LME is broader and takes some hunting to find what you want.
If you can get a handle on forecast you could also negotiate with your supplies and develop a mix of raw from each that you predict to use. Not necessarily binding agreement as you want to avoid that but could provide some visibility which could provide stability.
I get the lead time game and deal with it daily. Glad non ferrous has settled to a degree. Sheet metal is a bit of an issue if your doing transformation. Sheet product about 40% of a finished good is raw material vs machined it’s 10%-15%. So a swing in raw price for sheet has a much bigger impact on what your selling.
Fully. Customer has been unable to provide this for a variety of reasons but their new logistics person has promised monthly rolling 12mo forecasts, which would be a godsend, even if they’re wrong.
Some of the products we make for them “feature” 75% material cost, so yes, very sensitive to sheet pricing. Huge parts of 316 with very little processing…
Always price for your worst case unless incremental sales are lost at the higher pricing. If you have a captive customer you should be able to price at the worst case.
Seeing you are dealing with SST, why not do what all my vendors are doing, quotes are valid for 24 hours… what a pain.
Not sure what level of inventory you hold, but a 5 month lead time obviously introduces risk.
Obviously there would be a cost of inventory, but perhaps looking at minimum stock levels to offset some of that or changing them is worth considering
Different sectors work on different forecasting durations e.g. tentative 6 months demand, more predictable 1 month and then absolute certainty may be hours to 1 week e.g. food / certain automotive components
Not sure monthly rolling 12 month would be as helpful as having that plus shorter intervals.
If your lead time is 5 months but the customer is only ordering at 1 month notice that’s a real problem unless you carry significant stock.
Can the customer guarantee minimum order levels per month / quarter and call off?
Sounds like the steel drum industry, stainless wine drums have similar issues, small change in material cost has big impact
Thanks both for your input. Forgot I had a couple more replies here, wanted to offer my thanks before the upcoming snap (although Andrewmc has already been banned), so I’m shouting into the void a little anyway.
Sulliesbrew, I think your answer is probably where the smart money lies.
Andrewmc has landed on a particular problem which is that material lead time is >> order notice from customer.