Vendor Price Validation: Beyond the CPI

1. Vendor Price Validation: Beyond the CPI Welcome

2. Introduction • Joe Guy, Procurement Officer • Maricopa County Office of Procurement Services

3. Agenda • Price Validation • CPI • LME • CME • EIA • Choosing the right tool • Negotiating with the vendor • Risks

4. 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

5. 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

6. 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

7. Sample CPI Report

8. 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%

9. 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)

10. Other CPI Reports • Selecting the PPI report

11. 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

12. 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

13. 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

14. 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

15. 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%

16. 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%)

17. 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)

18. Questions?