Category Management in Procurement Practice: A Case of HDPE Pipes

This article suggests a practical procurement case from the infrastructure company (e.g., water transmission and distribution.) 

One of their top-spend items is a high-density polyethylene (HDPE) water pipe.

Let's look closer at the sourcing strategy for this category.

HDPE pipe sourcing strategy: it's more than just the Polyethylene cost.

Suppose you analyzed all the "usual suspects": unit price, delivery terms, and payment.
Is there anything else we need to look at?

The basic idea is that polyethylene (P.E.) is derived from ethylene, a crude oil or natural gas product. As crude oil prices rise, ethylene production costs also tend to increase, leading to higher polyethylene prices. 

However, the relationship can be more complex due to feedstock flexibility (polyethylene can also be produced from natural gas liquids,) currency rates, and market dynamics. 

As per some industry analysts, the polyethylene price index had some correlation with WTI prices, albeit a weak one. You cannot simply prorate the P.E. cost to crude oil one; many more factors are there to consider: 
  • supply (e.g., the U.S. market restricted supplies from the Middle East, where the P.E. production facilities are abundant)
  • demand (e.g., stagnating economies in Europe don't generate higher demand)
  • currency (e.g., a weak or strong dollar, local inflation affecting the manpower cost)
  • logistics (e.g., price of imported P.E. products or ethylene.)
Category managers and analysts must consider all those factors to develop a balanced sourcing strategy. 

Local logistical costs of HDPE pipes

Let's also consider one more HDPE cost-related factor - local logistics.

The standard form factor is a 12m HDPE pipe.  

Loose HDPE pipes

However, smaller-diameter HDPE pipes can be produced in rolls of 100m.

HDPE Pipes in rolls

So, if you want to order 10,000m of 110mm HDPE pipe, it will take 3 trailers, each with 300 12-meter pipes on 50 pallets, or 7 trailers with 16 rolls per trailer.

Due to the complexity of production, 100-meter rolls cost approximately 6% more than loose pipes and nearly 2.5 times more in local logistics. 

Rolls will also have higher internal logistical costs, requiring more warehouse space and complex handling equipment. 

Water leakage risk

On the flip side, if your contractor needs to connect a house to the water central with a 50-meter section, they must weld 4 pipes instead of simply cutting off half of the roll. You should factor in the cost of welding and a drastically higher water leakage risk. 

We also missed a smaller piece of analysis. 16 rolls = 1600m, so for a 10,000m order, you would need 6,25 trailers; one trailer will drive more than half idle. 

Therefore, consider changing the single order volume to 9600m. This corresponds to a saving of 0.2% of the total order cost. A penny saved is a penny earned.

Category management lifebuoy

All of the above is meant to prove the importance of category management. 

HDPE pipes are one of the less sophisticated categories, yet they require knowledge of commodity markets, logistics, fundamental economic analysis, industry working practices, and more.

If your company keeps negotiating unit prices, it needs a category management lifebuoy.  

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More information on this and other exciting topics can be found in "The Technology Procurement Handbook." It represents 23 years of experience, billions of dollars worth of successful sourcing projects, and 1000s hours spent on research, analysis, and content creation for the most demanding professional readers.
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