For commodity-based businesses, frequent price fluctuations mean it’s often difficult for procurement departments to deliver savings - and for the business to measure procurement performance. Efficio developed a solution that allowed GTM to achieve both, with outstanding success.
GTM is a leading distributor of industrial chemicals throughout Latin America. They typically purchased chemicals from a range of suppliers on the spot market, which limited their ability to negotiate on price. Efficio was engaged to identify potential opportunities for savings, and ensure the savings were sustainable in the long term.
To address the challenge of short-term price changes, Efficio designed and negotiated a series of long-term index-based contracts – a new paradigm for the Latin American market which delivered significant savings. It also provided the basis for a new quantitative KPI system which, for the first time, gave GTM a robust way to measure the real performance of procurement.
For products with relatively stable prices, procurement departments have a wide range of tools they can use to achieve cost savings, such as renegotiating baseline prices. However, in the 11 Latin American countries where GTM operates, chemicals were historically bought and sold at spot prices, which meant many of these options were not available.
As well as reducing the procurement team’s negotiating levers, this also meant their performance was often questioned as GTM’s sales and production teams always compared negotiated prices to current market prices.
GTM’s existing process for measuring procurement performance was based on comparing prices with those achieved by competitors. However, unreliable import statistics meant this approach was inaccurate and had little credibility.
Efficio’s response was to move from negotiating spot prices to an index-based approach, which linked pricing to the relevant commodity indices wherever possible. While index-based pricing is widely used among manufacturers in Europe and the US, it was an innovative approach for a distribution company – and for Latin America.
The new approach provided an additional lever for the procurement team, as well as a fair and transparent basis for measuring their performance.
Implementing an index-linked approach within GTM was a complex undertaking. As well as developing the processes that underpinned the approach, it also required upskilling the GTM groupwide procurement team, and a change in organizational culture to use the new system as a way of driving continual improvement.
Efficio has helped us achieve significant savings in a challenging environment and given us an effective platform for the future. The index-based performance measurement system they designed guarantees a fair and just evaluation of both the individual and collective performance of the procurement function.
Efficio began by identifying immediate opportunities for savings. They delivered a significant reduction in addressable spend through a combination of factors, including restructuring their supplier base and consolidating volumes with some suppliers to achieve volume discounts.
Most importantly, they were able to renegotiate long-term index-based contracts for a number of key products. The first step in this involved selecting the most appropriate index for each product (e.g. commodity indices like IHS or Platts), or developing formula-based indices which track the prices of the main feedstock.
Once the appropriate indices had been developed, Efficio negotiated index-based contracts for a number of key products. This was a challenging process as many suppliers were large, powerful organizations that were initially sceptical and pushed back on the proposed changes. Bringing them on board required a change in approach, however this proved very successful in creating a much more positive and collaborative response from most suppliers. Where index-based contracts could not be negotiated, Efficio achieved preferential commercial conditions for spot transactions with key suppliers.
The next step was to ensure the savings were both sustainable and measurable. Efficio introduced a new KPI system using the relevant commodity indices as a base. Actual purchase prices were compared to the index over a baseline period, to create an objective benchmark (for example, the historical benchmark price for a product might be 2% above the index). The procurement team was then assessed on the prices they achieved in relation to the benchmark.
Cost savings: Efficio identified a 4% reduction in addressable spend across the group – a significant saving for commodity chemical products. Savings are measured quarterly against the new KPIs and in the first quarter, the savings targets have already been exceeded.
Performance measurement: GTM now has an objective KPI-based method for measuring the performance of the procurement team and their contribution to the success of the business. This includes the establishment of KPIs for products where there were no index-based prices in place. The new process has established quantitative benchmarks that provide fair and transparent targets, as well as feedback for the procurement team and wider business. It also provides a clear incentive for ongoing improvement.
Procurement transformation: The project has fundamentally transformed the way procurement is undertaken at GTM. Efficio upskilled GTM’s procurement team in the new processes and techniques, redefined categories and established new roles to more accurately reflect the new approach. They also challenged the existing culture of procurement, which had previously had no accurate method or motivation to measure its performance. The result is that GTM now has a best-in-class procurement organization that is seen to be adding real value to the business.