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Reassurance in purchasing raw materials

For fabricators, steel purchasing clout suddenly comes from a most unlikely source--the competition

The fabricating shop floor has changed dramatically over the past several years with the introduction of automated material handling systems and lean manufacturing practices that keep the aisles free of work-in-process. One aspect remains constant, however, even when fabricating operations from different eras are compared: metal.

Today raw material remains one of the largest items on the fab shop’s balance sheet. According to the “2013 Financial Ratios & Operational Benchmarking Survey,” published by the Fabricators & Manufacturers Association International, average direct material expenses accounted for 36 percent of sales. That was quite a bit more than the direct labor average (14 percent) and indirect labor (9 percent).

That explains why manufacturers are still somewhat cautious when it comes to metal prices. An August survey of manufacturers and distributors, sponsored by Sikich LLP, a professional services firm, revealed that 86 percent said they expected the cost of raw materials to either increase or remain the same in the next 12 months. That’s a large percentage considering the global economic slowdown in which the demand for raw materials of all kinds dropped dramatically this year.

So metal fabricators should be interested in trying to get raw material costs under control, but do they pursue this mission as aggressively as they can? In most instances, they do not.

Unfortunately, trying to get a feel as to what raw material pricing is—or should be—in a given market is a real challenge. Most buyers understand the basic premise that catalog pricing is merely the starting point for negotiations, but they probably aren’t knowledgeable about what other companies are actually paying or how the market is influencing pricing.

Supply Dynamics, Loveland, Ohio, believes the answer isn’t as elusive as it once was.

The company is launching Price Dynamics (or PDX, as they call it), a web-based community where buyers can share their purchasing experiences. The goal is to leverage their input to bring greater price transparency to the marketplace.

Metal buyers from dozens of industries are expected to visit PDX (www.pricedynamics.com) so they can anonymously and securely compare metals prices and evaluate all distributors.

“Think about this in terms of how most people buy a car,” explained Trevor Stansbury, Supply Dynamics founder and president. “Everyone knows that the manufacturers’ suggested retail price is just that—a suggestion. Similarly, catalog prices for metals are not necessarily a good measure of fair market price which, as we all know, is a moving target subject to lots of variables.”

Stansbury added that when someone purchases a car, he or she typically consults an online equivalent to Kelley Blue Book and then checks to see how cars of a similar make and model are valued. In the same way, PDX provides reliable statistics about what others are paying for their raw materials. This comparison takes into account things like form, grade, specification, and transaction size.

How It Works

Buyers get free access to basic benchmarking functionality. After registering, they are prompted to submit some basic information about what they are buying, and more important, what they are paying or have been quoted for the materials that interest them.

Pricing input is then combined to identify useful insights that are served up to the community. All of this is done in a way that is legal and anonymous, according to Stansbury.

Once the information is submitted, the buyer sees an animated dial, which clearly displays how that buyer’s pricing measures up to similar purchases made by other users (see the illustration). Various statistics reveal things like high, low, mean, and average transaction price. Accessible through desktop or laptop and coming soon for tablets and mobile devices, the service can benchmark against a range of material forms, alloys, and grades, including alloy and tool steels, carbon steel, aluminum, brass, bronze, cobalt, nickel, stainless, and titanium.

Bruce Washington, a Supply Dynamics senior metals price analyst, added that PDX also displays alternative supply sources if users discover their metals prices don’t quite measure up.

In addition to the basic membership, which is free, Supply Dynamics offers premium- and enterprise-level memberships. A premium-level subscription provides advanced reports and filters for parsing results, and users can save purchasing histories.

An enterprise-level subscription allows large OEMs to integrate PDX with their own ERP systems and, in some cases, to connect other members in their extended supply chains.

If a fabricator is interested in an executive-level snapshot of how well it is purchasing across all of the raw materials it buys, it might be interested in Price Dynamics’ “Metals Benchmarking Report” (MBR). The report reveals how a company’s raw material purchases compare to like purchases made by hundreds of other metal buyers.

Other commercially available reports typically rely heavily on transactional polling and catalog prices, Stansbury said. The MBR is different because it is based on prices actually paid or quoted, spanning more than 561,000 user-entered price points and over 30 million scientifically extrapolated, “should-cost” price points, he added. It also provides enough detail to differentiate pricing based on transaction size and other variables.

About the Author
The Fabricator

Dan Davis

Editor-in-Chief

2135 Point Blvd.

Elgin, IL 60123

815-227-8281

Dan Davis is editor-in-chief of The Fabricator, the industry's most widely circulated metal fabricating magazine, and its sister publications, The Tube & Pipe Journal and The Welder. He has been with the publications since April 2002.