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5 Reasons Supply Base Rationalization Can Harm Spend Management | Spend Matters

1. Ignores the Positive Savings from Price Dispersion
Although procurement professionals may not use the term in their daily lives, price dispersion is a key purchasing concept that is ignored in traditional supply base rationalization. Price dispersion is an economic scenario in which various sellers offer different prices for the same product in a specific market. It arises from a lack of price transparency across all sellers at any given point in time.

Research indicates that harnessing the power of price dispersion can be very effective for securing savings. Simply put, due to continual price fluctuations, even with the strongest negotiated contract pricing, no one supplier will provide the lowest-priced products all the time.

According to a 2006 research report from Ed Hopkins Economics1, economists who study price dispersion have found differences between the lowest and highest prices offered from various suppliers for the same products can average around 9%. However, with modern e-commerce systems and advanced pricing software, these price fluctuations can be even greater.

In a recent white paper published by Aquiire2 that analyzed samples of past purchases of large enterprises, their data analysts found that organizations can save more than 19% on their indirect spend by adding more suppliers into their private e-procurement marketplaces and selecting the lowest-priced products at the time of purchase via real-time comparison shopping. The research compared pricing in a competitive e-commerce environment and included approved (pre-negotiated) suppliers, contracted group purchasing organizations (GPOs) and select B2B e-commerce marketplaces.

The practice of rationalizing a supply base and asking employees to purchase from a limited number of approved suppliers prevents procurement organizations from realizing these savings benefits. And since no single supplier has the lowest cost on a specific product at every given moment in time, locking a few partners into a prenegotiated, catalog-based pricing for internal purchases prevents e-procurement users from accessing the benefits of price dispersion—except when they go rogue and purchase outside of the procurement platform.

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5 Reasons Supply Base Rationalization Can Harm Spend Management.