It has been shared by key players within financial institutions that one catalyst in bringing the world’s economy down has been the intuitive process through which buyers and sellers of stock take on board news and absorb market price and stock levels.
When done in the shortest possible time through an efficient market, sellers can actually respond ahead of the market to shortsell stock.
It is the ‘efficient market’ at the core of the price discovery process that enables buyers and sellers to unearth price and act with haste. This is the focus of this paper and how IT buyers are using aggregation technology to keep ahead of the volatile IT market.
In the IT market
To enable better purchasing power, buyers and sellers of IT alike need to have the ability to identify price changes up and down in the shortest possible time.
The process of price discovery can be facilitated with emerging technology ‘tools’ that enable users to investigate, unearth and discover new pricing by bringing together and standardizing critical market data.
For Mercato ITelligence, price discovery is considered to be the ‘golden fleece’ of delivering cost reduction on the purchase of IT products.
The analogy is drawn with the financial markets where a good market is ‘an efficient market’, where forecasts about future risk and return (movements) determine valuation.
The price observed at an instant in time on the ideal efficient market is a good assessment of future risk and return.
This price is not constant, because new information is being constantly generated in the economy. This is closely analogous to the IT market where availability and supply-demand dictate price and a highly volatile market.
How price discovery works
- Speculators in markets observe new information before buying, from a fresh sense of risk vs return (IT prices rising or falling) and discover that the present valuation on the market or agreement is out of date
- Speculators or IT buyers then actually risk budget in taking a position on the market and buying in. As IT product is bought, so stock levels decline and supply-demand balance begins to impact price
- If a buyer acquires new market information that justifies a lower valuation, then he will look to buy at a cheaper rate. Efficient and quick market technology helps an IT buyer discover that one price is cheaper than another at the same time as enabling them to re-evaluate their ‘buy-in’ to a product based on other supply chain related information such as the decline in dollar exchange rate. This activity serves to feed new information into prices, stock and price policing
Price discovery dynamics can be considered the beating heart or poisoned chalice of financial or IT markets depending on your position in the market – buyer, reseller, distributor, manufacturer. However, speculators do price discovery and without speculators a financial market would not exist.
An efficient market is one that must exhibit volatility. When ‘news’ breaks, prices must respond. An efficient market is one where new information is rapidly captured into prices and stock. A better market is the one that reacts fastest. This is often a market that appears to be highly volatile.
The technology role
Technology and the internet have played a critical role in delivering information to buyers and sellers in real-time. The financial Stock Market is backed by aggregation technology.
Mercato Solutions’ has aggregation, cleansing and enriching of real-time data at its core. This unique capability for large scale data management coupled with deployment of tools that help users buy better to save money or sell better to make money, is delivering real-time data to the finger tips of buyers in the same way that the stock market delivers information to traders.
Mercacto’s benchmarking tool applied to the IT vertical is called Mercato ITelligence, which is a simple online tool that advises IT buyers of trade guide price and stock levels on IT products. This technology empowers IT buyers with market knowledge, so they can rapidly negotiate down the price of IT products with contracted suppliers.
Buyers simply input supplier product lists or spot checks online for an automated comparison with trade guide price and stock in the UK IT supply chain. Powerful and efficient data management behind Mercato ITelligence compares over 500,000 line items to deliver price, stock and product information on over 150,000 ‘live’ products from more than 2,500 manufacturers.
The user discovers what margin their supplier is proposing and receives daily alerts in relation to their Product Lists, stating whether price or stock have moved.
Management functionality provides insight and validation of current purchasing ability and expenditure levels. Plus, the tool can automatically generate Request for Quotations (RFQs) in order to speed up the process of actually buying.
Mercato ITelligence enables purchasers to:
- Identify fair price and qualify agreed margins
- Recover historical over-charging
- Monitor and track price fluctuations
- Generate automated Request for Quotations to speed-up buying
- Stay on top of market developments
- Plot key market trends to forecast price and stock
- Strengthen supplier relationships with transparency
This technology and the enhanced price discovery that it enables is helping buyers stay ahead of the IT market and supply chain dynamics to buy better value product more consistently. Mercato technology is accredited by CIPS for offering procurement excellence.
This type of technology is particularly beneficial in the current climate where purchasers are being challenged to minimize the impact of rising IT prices.
A supply chain and price dynamic turned on its head
As IT buyers strive to meet demands for cost reduction, IT trade prices are on an increasing trend thanks to the volatility of the global economy. This is one of the most volatile price and stock periods the IT industry has seen.
In Q12011 to date, raw material costs have increased by 27% (copper, steel and plastic) and manpower cost in China has gone up 30%, whilst fluctuating exchange rates are also playing a key role in directing volatility.
To these three economic factors, the addition of certain specific product and manufacturer battles in the marketplace, is further impacting on dynamism of the 2011 IT supply chain
It is believed that there has rarely been as many global factors coming together at one time.
With IT budgets being tightened and IT prices increasing, IT buyers’ skill sets are clearly being tested to the limit.
The IT industry and buyers are having to deal with a product lifecycle turned on its head.
Prices usually decline over time as product passes through the lifecycle, now prices are bucking the trend and increasing during the products life. This is a culture shock for the industry and those on the buy-side.
UK supply chain data from Mercato ITelligence has qualified these trends with the number of product price changes growing considerably over the last six months to date. As an example, Memory over the last few months has been in short supply. As always in such a status, prices have increased but this reversed in January 2011 when the new manufacturing plants came on stream and we are back into over supply and price is reducing again.
The IT market place is a dynamic market. On an average day there are approximately 8,000 price changes. But the Mercato ITelligence data bank has logged over 10,000 price changes per day on 70% of days during the last 7 months. This is 20% higher than normal price volume changes. On 15% of days in the last seven months, price changes exceeded 20,000 in a single day. This represents more than 2.5 times the normal expected price changes per day.
However, on peak days there were over 30,000 price changes in a single day. The biggest day saw 34,750 changes on July 6th whilst the second biggest day was August 3rd with 30,968 price changes. This represents more than four times the normal expected daily price changes for a single day.
On these 2 days approximately 20% of all IT products in the market changed price.
However, price is just one pivotal factor in the dynamic IT marketplace, the other is new product introductions.
On an average day, the market expects approximately 300 new products per day, which equates to 72,000 per year. In the last 3 months that rate of change has almost doubled with a peak in January 2011 of 1,466 new products in a single day. This is unprecedented. New products are a mechanism that can be used by manufacturers to disguise pricing changes. By changing the spec of a product they change the price.
In an average supermarket there are approx 20,000 food products on display, the Mercato ITelligence data bank or catalogue this month shows over 150,000 live products.
Price changes in IT are normal, new product introductions are normal but the big difference with the IT market currently is the rate of change. No other market moves as fast as the IT market or boasts such a large product range as the IT vertical.
In the context of price discovery
The best and more specialist buyers of IT are securing data and then applying vast swathes of knowledge to that information to help them buy more intuitively. This means using the information they gather, and inherently the price discovery process, to stay ahead of the market and plan buying patterns, forecasting when is the best time to buy for best value.
Forecasts have suggested that if more buyers adopted emerging technology for price discovery, particularly in the public sector then pessimistic savings in excess of £1bn could be expected.
However, there is a general shortfall in IT buyer knowledge as to the greater global supply chain and the factors affecting it. Provision of data is all well and good but without knowledge transfer up to buyers from the supply chain, genuinely informed purchasing decisions will continue to be a challenge.
There is a call to action for buyers to become ever more engrossed in understanding the IT supply chain and factors influencing it, price and stock. Without this knowledge there is only so much that emerging technology can do to stimulate price discovery and achieve sustained best value purchases. Although technology providers from within the IT marketplace, like Mercato, are offering guidance, updates and training on market trends.
Without an understanding of all the factors impacting on the supply chain at any given time it has become increasingly difficult for IT buyers to truly forecast and plan when is a good time to buy or not.
Many IT buyers lack tools or deep levels of supply chain information for informed comparisons, this is detaching them from keeping track of the volatile marketplace and achieving best value purchases consistently.
As a result, more people are buying ad hoc and accepting less than best value on purchases. This is impacting on the bottom line of organisations at a time when budgets are shrinking and Financial Directors are being challenged with more defined budgets and ROI accountability.
For the professional IT manager tested with maintaining an IT system and buying IT, there simply isn’t enough time in the day to absorb reams of information regarding the supply chain to facilitate better judgment of value at point of purchase. Likewise, procurement professionals cannot be expected to absorb enough information on such a volatile market to buy best value without support.
This means the process of price discovery is slow and perhaps meaningless as the volatility of the market dictates price and stock changes are happening by the minute.
However, for those in a multifaceted role that includes buying, technology like Mercato ITelligence can offer a fully accredited best practice ‘tool’ that will deliver price discovery through an efficient marketplace for greater levels of sustained best value purchases and time savings.
This is particularly appropriate technology during the tough economic conditions when buyers are ever more pressured to deliver on numerous objectives. The technology is proven to help with average savings of a working week in man hours and considerable cashable value on IT budgets. It shortens the time to discover better prices to seconds from hours with automated alerts.
There has never been a better time for buyers to adopt best practice processes and investigate tools that will help them keep a finger on the pulse of IT stock and price, saving them time and money. Efficient marketplace technology exists and buyers now have the power to discover prices faster than ever before.
The next step is for buyers to absorb themselves in the finer dynamics of the supply chain to judge future buying patterns based on today’s information.
0845 111 4006
www.mercatoITelligence.co.uk
www.mercatosolutions.com