A veteran sales rep for one of the world’s largest lubricant manufacturers describes the price volatility over the course of the last two quarters; “I’ve been doing this for 30 years, and I’ve never seen anything like it.” From January 2008 until the end of February 2009 the market saw Group I and II Base oils jump from the low end of three dollars a gallon to a high of around five, and then plummet back down below three (Lubes N’ Greases Magazine-March 09). As the roller coaster began its ascent with no end in sight, many organizations re-examined their lubricant purchases, and went to market in search of relief. While consulting a client in this exact situation, I found that, in today’s market, price response is often as important as the pricing itself. For the purposes of this article, I will refer to the primary incumbent supplier as Supplier A and the secondary as Supplier B.

In the early summer of ’08, I began negotiations with both Supplier A and Supplier B to accomplish the client’s goal of immediate price relief while rationalizing the base of supply. As Supplier B was the secondary supplier for the client’s lubricants, we developed a strategy around consolidating the volumes purchased from A and B into one source of supply with the supplier that offered the most competitive pricing for the total volume. Initial sourcing results produced a savings of approximately 36% by consolidating supply with Suppler B. This unfortunately is not where the story ends.

Since my company Source One works on a 100% pay-for-performance business model, protecting our clients’ savings is as important, if not more important, to us than it is to them. For this reason, we meticulously track both incumbent and market prices of any commodities/services we source. After a few months of observing the client’s purchasing from Supplier B, we noticed significant price increases that initially seemed unfair in the face of the sharply declining crude oil market. While pushing back on the increase, Supplier B explained that their pricing was tied heavily to the Base Oil market which was still increasing steadily. At the time, this was a very defendable position, so we had no choice be to accept the decrease in savings and keep a keen eye on the Base Oil markets.

As November passed, Group I and II Base Oils both dropped nearly a dollar per gallon. When prices continued to decline through December, we expected that we would surely see Supplier B’s prices follow suit. This, however, was not the case. When we contacted Supplier B to about the phenomenon, they refused to budge and could not offer any transparent means for explaining how they indexed and adjusted their pricing. After several hold-outs for information and discussion it became evident that Supplier B may have been planning to turn a blind-eye to the Base Oil markets until prices stabilized at more profitable levels. We called them on their bluff.

In January we reached out to Supplier A to see how their pricing structure responded to the Base Oil Market Conditions. Not only did Supplier A’s pricing respond more favorably, but they also provided a very clear weighting system of publicly available indexes that they use to determine prices. They also provided options for pricing review such as length of review period and different ranges of “trigger price changes”. Supplier A offered “trigger price changes” as high as 15-20% for risk averse or resource constrained companies and as low as 3% for companies that have the resources and security to attempt to capture savings from small enduring market movements. Considering the volatility of current lubricant prices, this sort of flexibility and transparency presents a substantial value.

The lesson to take from this is that we are no longer buying lubricants in a world where a 5% movement over the course of a month is substantial, and 10% quite large. Sourcing professionals are now purchasing lubes in a market where a 15% shift in one month has recently become the norm. In this environment great value can be derived from determining your company’s risk tolerance and finding a supplier with transparent pricing mechanisms that fit your company’s strategy.
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Steve Tatum

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    Lubricant Manufacturer