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Vendor Price Validation: Beyond the CPI. Welcome. Introduction. Joe Guy, Procurement Officer Maricopa County Office of Procurement Services. Agenda. Price Validation CPI LME CME EIA Choosing the right tool Negotiating with the vendor Risks. Price Validation.
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Introduction • Joe Guy, Procurement Officer • Maricopa County Office of Procurement Services
Agenda • Price Validation • CPI • LME • CME • EIA • Choosing the right tool • Negotiating with the vendor • Risks
Price Validation • When should you allow price changes? • Determine price volatility • How do you know the price changes your vendor is asking for are reasonable? • Options: • Market Survey • Re-Bid • Tie the increases to an index
CPI • CPI (Consumer Price Index) • Approximation of the cost of living based on a market basket of goods • Based on the prices of 211 categories of items across 87 metropolitan statistical areas • Prices are the transaction price inclusive of taxes for all 94,000 items
CPI • Uses: • Straight CPI is a good statistical average for gauging overall price fluctuations in the economy • Access • www.bls.gov • Recommended report: • CUUR0400SA0 – Western Urban, All Items • http://data.bls.gov/pdq/SurveyOutputServlet;jsessionid=25B5383FA374E2D7B1F97E7022BC6508.tc_instance4
Calculating Change • % Change Formula: • ((Current Index – Previous Index)/Previous Index)*100 = % Change • Example • Current Index = 236.227 • Previous Index = 218.533 • ((236.227 – 218.533)/218.533))*100 = 8%
Other CPI Reports • Urban Wage Earners and Clerical Workers • Database contains information on services such as medical and educational • PPI (Producer Price Index) • Much more detailed reporting on a particular class of producer good or combination of goods • Based on the selling price published by producers (not wholesale price)
Other CPI Reports • Selecting the PPI report
LME • LME (London Metals Exchange) • http://www.lme.com/home.asp • Commodity exchange for major metals • Use market data to derive price fluctuations over a period of time • Tool is good for measuring construction costs for steel and copper
CME • CME (Chicago Mercantile Exchange) • http://www.cmegroup.com/ • Commodity trading for a wide range of products from energy to agriculture to financial instruments • Most useful in determining historical price changes for agricultural products • Bulk Flour • Corn • Soy
EIA • EIA (US Energy Information Administration) • http://www.eia.gov/dnav/pet/pet_pri_gnd_dcus_r50_w.htm • This link is for the West Coast (PADD 5) Gasoline and Diesel Prices • Use the historical data for determining fuel surcharges, shipping rates
Choosing the right tool • It is to your advantage to tie contract pricing to an index or a combination of indexes • Break down the price into labor, fuel, commodity, overhead • If the contract is service based, use the CPI as a “cost of doing business” index • % change in CPI equals % change allowable in labor rates
Calculating Change • % Change Formula: • ((Current Index – Previous Index)/Previous Index)*100 = % Change • Example • Current Index = 165.0 • Previous Index = 150.0 • ((165.0 – 150.0)/150.0))*100 = 10%
Negotiating with the vendor • Make sure that your price evaluation is clearly defined in your contract • Frequency • Exact index(es) • If commodity has large price swings (fuel), make sure you have the right to demand price reductions as indexes fall • Consider adding caps to the allowable increase (such as the lesser/greater of index change or 5%)
Risks • All indexes are statistical averages and may not accurately reflect real time prices • You may not be dealing directly with the manufacturer. Distributors have limited control over up stream prices • Make sure that vendors do not try to double dip an increase (3% commodity increase does not equate to a 3% profit increase)