Your tender is launched, you have selected the most interesting suppliers for your company… now you need to analyze the feedback and choose your future partner.
Price differences, cost structures: pitfalls to avoid
When analyzing average prices, you will often find a Gaussian distribution, with the majority of your suppliers falling around the average price, and a minority “outside the norm,” either very cheap or significantly more expensive than their competitors. The reasons for these discrepancies may work in your favor: a competitive cost structure, well-managed innovation, an ideal match with your desired production capacity, or even an introductory price to initiate a new partnership.
However, they can become dangerous for your company: company in financial distress, anomaly, risky dumping, etc.
Sometimes additional costs can also be a source of opportunities: innovation allowing an overall reduction in final costs, or a better marketing positioning of your product, for example.
To properly analyze feedback from your suppliers, remember that a selling price is broken down into several elements: raw material costs, labor (machine and/or manpower), logistics costs, and finally, the profit margin (distribution, marketing, profits, etc.). Direct and indirect, fixed and variable costs must be included in the analysis to correctly evaluate the different solutions. A good understanding of cost drivers allows you to anticipate and prepare for negotiations.
Calculating the break-even point
To choose the right supplier, you must consider the break-even point (yours, but also indirectly that of the supplier). This point, also known as the “break-even point,” represents the minimum revenue (excluding VAT) your company must generate to reach equilibrium, meaning a zero profit (neither profit nor loss). This point depends on your fixed costs (FC) and variable costs (VC). The profit margin is the key indicator to monitor for effectively managing your purchases, enabling you to achieve your company’s profitability goals. It is also useful information to apply to your suppliers during negotiations. For example, a high margin can suggest significant room for maneuver if competitive advantages are effectively leveraged.
Of course, another question to ask yourself is about the frequency of your purchases, comparing acquisition costs AND holding costs based on the number of orders. This will help you determine whether it’s better to order small quantities frequently, or the other way around. Formulas exist (such as Wilson’s formula) to calculate the optimal order quantity and optimize procurement costs.
Example of a Wilson curve:
Communication of results
Your relationships with suppliers should be viewed as long-term, sustainable, and balanced partnerships, especially for “Strategic” or “Critical” relationships according to the strategic purchasing matrix (Kraljic). If necessary, you can implement an automated price revision formula, ensuring that it is not overly complex (and therefore costly and unprofitable). A well-designed formula, with the right revision criteria selected, can mitigate risks over time, avoid repeated renegotiations, and provide a more objective basis for negotiations over the long term.
In any case, remember to communicate the results to all participants, as well as internally, at the end of a tender process. Nothing is more frustrating for your stakeholders than to be left waiting for information that is important to them, depriving them of an opportunity to improve and better understand your needs.