Builders merchants, building materials companies and building trade suppliers are working in a competitive industry in which profitability is heavily reliant on procurement to strike the right deals.
We’ve recently been working with Richard Piekar, a global procurement expert, and wanted to share with you his experience of developing procurement excellence at CRH plc. CRH is a leading global building materials group employing over 89,000 people at around 3,900 locations worldwide.
Richard’s journey to procurement excellence included building private label ranges to increase margins and foster customer loyalty, and introducing fact based category management and sourcing.
Fact based Category Management and Sourcing
Richard and his team worked hard to improve category management and sourcing at both country and cross-country levels at CRH.
Not all suppliers are equal, and classifying suppliers as high or low value brands was the first stage. Negotiating with low value brands (where competition is rife) is more of a price sensitive discussion than with the high value brands where other factors can play a role.
Then Richard introduced fact based negotiations — with the goal of looking for a fair share of profitability with suppliers on a category by category basis.
A key part of fact based negotiations is to view pricing based on adjusted gross margin. This means adding in year-end rebates, retrospective discounts, marketing contributions, refunds, payment discounts and other factors to calculate the true net price. The problem is that when looking at historical data, often these additional “facts” are hidden elsewhere in the accounts as accruals or cash receipts that are not necessarily tied back to the product line on which they were earned.
Initially, this was solved by maintaining rather complex spreadsheets showing the price and capturing all the elements leading to the net net price. It was a time-consuming process, fraught with the potential for error.
And that was only one element of the facts that Richard takes into his negotiations. For each product negotiation, Richard and his team collate details about:
- Adjusted gross margin by supplier
- The share of products in the assortment
- Market share of each supplier
- Growth in sales by supplier
- Expenses on required and non-required products
- The share of promotional leaflets of the suppliers
- Profitability per supplier after logistics and storage costs
According to Richard, “The key is knowing to what extent you are supporting the supplier compared to the net margin contribution of each supplier”.
To find out more about Richard’s journey to Procurement Excellence, and how DealTrack supports fact based negotiations, listen to our recorded webinar Vendor Rebates — How to manage complex deals and drive margin.