HDPE Pipe Sourcing: Beyond Polyethylene Cost
When sourcing high-density polyethylene (HDPE) water pipes, one of the top-spend items for infrastructure companies, more than the unit price must be considered.
This article explores a strategic approach, covering factors like raw material dynamics, logistics, and risk management.
It also employs ChatGPT-guided analysis to assess the feasibility of two main scenarios in category management.
The Link Between Polyethylene Prices and Crude Oil
Polyethylene (PE), the main component of HDPE pipes, is derived from ethylene—a crude oil or natural gas product. Intuitively, as crude oil prices rise, polyethylene costs follow. However, the correlation isn't linear.
Key factors influencing polyethylene prices include:
Feedstock flexibility: Ethylene can also be produced from natural gas liquids, not just crude oil.
Currency fluctuations: A weak or strong dollar impacts global trade costs.
Supply chain dynamics: Restricted supplies from regions like the Middle East affect availability.
Demand trends: For instance, stagnating European economies may dampen demand.
The polyethylene price index shows some correlation with WTI crude prices, but it's weak.
To build a robust sourcing strategy, category managers must consider these nuances, not just crude oil price trends.
Local Logistics: A Cost-Defining Factor
HDPE pipe transportation adds another layer of complexity.
Standard vs. Rolled Pipes:
12m loose pipes: Cost-effective for transportation but require more joints.
100m rolls: Reduce welding at the cost of higher production and logistics—6% more for production and up to 2.5x higher logistics expenses.
Storage Challenges: Rolled pipes require more warehouse space and specialized handling equipment, increasing internal costs.
Optimizing Trailer Utilization: A 10,000m order of 110mm HDPE pipes requires:
Three trailers for loose pipes (300 pipes/50 pallets per trailer).
Seven trailers for rolled pipes (16 rolls per trailer).
This mismatch in volume utilization leads to inefficiencies. Adjusting order sizes, like reducing to 9,600m, can save 0.2% of total costs—a small but impactful optimization.
Water Leakage Risks and Long-Term Costs
Using rolls for household connections minimizes welds, reducing leakage risks and long-term maintenance costs. For example, a 50-m section from a roll requires no welds, while loose pipes need four.
However, these benefits must be weighed against increased production and logistical costs.
Category Management: The Key to Procurement Success
Let's summarize all the above. HDPE pipes, while seemingly straightforward, demand:
Knowledge of commodity markets.
Understanding logistics and economic trends.
Awareness of industry practices (e.g., installation processes).
Without category management, companies risk oversimplifying procurement to unit price negotiations, missing savings, and strategic opportunities.
Category management isn't just an approach; it's a lifebuoy for procurement teams navigating complex supply chains.
ChatGPT-guided feasibility analysis
In addition to our earlier research, we asked ChatGPT to provide the feasibility analysis for both scenarios (loose pipes and rolls). We carefully guided ChatGPT to provide realistic pricing estimates and avoid generic statements, and eventually, we obtained a practical analysis that equipped us for informed decisions.
Material Costs:
12-meter Pipes:
Unit Price: Approximately £10.10 per meter.
Total Cost: 10,000 meters × £10.10/meter = £101,000.
100-meter Coils:
Unit Price: Typically 6% higher due to manufacturing complexities, estimated at £10.71 per meter.
Total Cost: 10,000 meters × £10.71/meter = £107,100.
Transportation Costs:
12-meter Pipes:
A standard articulated lorry can carry approximately 3,333 meters of 110mm pipe.
Number of Loads Required: 10,000 meters ÷ 3,333 meters/load ≈ 3 loads.
Cost per Load: Approximately £3.00 per mile.
Assuming a 100-mile round trip: 3 loads × 100 miles × £3.00/mile = £900.
100-meter Coils:
A standard articulated lorry can carry approximately 1,428 meters of coiled 110mm pipe.
Number of Loads Required: 10,000 meters ÷ 1,428 meters/load ≈ 7 loads.
Cost per Load: Approximately £3.00 per mile.
Assuming a 100-mile round trip: 7 loads × 100 miles × £3.00/mile = £2,100.
Installation Costs:
Jointing:
12-meter Pipes:
Number of Joints: (10,000 meters ÷ 12 meters/pipe) - 1 ≈ 833 joints.
Cost per Butt Fusion Joint: Approximately £30 per joint.
Total Jointing Cost: 833 joints × £30/joint = £24,990.
100-meter Coils:
Number of Joints: (10,000 meters ÷ 100 meters/coil) - 1 ≈ 99 joints.
Total Jointing Cost: 99 joints × £30/joint = £2,970.
Labor:
Installation Rate: 200 meters/day.
12-meter Pipes:
Total Days: 10,000 meters ÷ 200 meters/day = 50 days.
Labor Cost per Day: £200.
Total Labor Cost: 50 days × £200/day = £10,000.
100-meter Coils:
Increased efficiency reduces installation time by 20%.
Total Days: 50 days × 0.8 = 40 days.
Total Labor Cost: 40 days × £200/day = £8,000.
Waste and Miscellaneous Costs:
Material Waste:
12-meter Pipes:
Waste Percentage: 2%.
Waste Cost: 2% of £101,000 = £2,020.
100-meter Coils:
Waste Percentage: 0.5%.
Waste Cost: 0.5% of £107,100 = £535.
Storage:
12-meter Pipes:
Each pipe is 12 meters long and typically stacked in layers.
Diameter: 110mm.
Space required: Approx. 0.5m² per pipe (stacked up to 10 pipes high).
Total number of pipes: 10,000 meters ÷12 meters/pipe=833 pipes.
Total storage area: 833 pipes ÷10 pipes/layer=84 m².
Storage cost: Approx. £5/m²/month in a standard warehouse.
Monthly Storage Cost: 84 m²×£5=£420.
Total for 2 Months: £420 × 2 = £840.
100-meter Coils:
Diameter of coiled 100-meter pipes: 2.2m per coil.
Space required: 2.2 m diameter2×π/4≈3.8 m²/coil.
Total number of coils: 10,000 meters ÷100 meters/coil=100 coils.
Total storage area: 100 coils×3.8 m²/coil=380 m².
Storage cost: Approx. £5/m²/month in a standard warehouse.
Monthly Storage Cost: 380 m²×£5=£1,900.
Total for 2 Months: £1,900 × 2 = £3,800.
Maintenance cost
Joint Failure Rate:
Typical failure rates for HDPE pipe butt fusion joints are meager due to their durability. However, around 2% of joints may require inspection or maintenance within a year, depending on installation quality and operating conditions.
12-meter Pipes:
Estimated Joints Requiring Maintenance: 833×2%=16.66 joints/year ≈17 joints/year.
Total maintenance cost: 17 joints×£50/joint=£850 per year.
100-meter Coils:
Estimated Joints Requiring Maintenance: 99×2%=1.98 joints/year ≈2 joints/year.
Total maintenance cost: 2 joints×£50/joint=£100 per year.
Total Cost Summary (Including 1-Year Maintenance)
Cost Component | 12-Meter Pipes (£) | 100-Meter Coils (£) |
Material | 101,000 | 107,100 |
Transportation | 900 | 2,100 |
Jointing (Initial) | 24,990 | 2,970 |
Labour (Initial) | 10,000 | 8,000 |
Waste | 2,020 | 535 |
Storage (2 Months) | 840 | 3,800 |
1-Year Maintenance | 850 | 100 |
Total Cost | 140,600 | 124,605 |
Insights:
Over one year, 100-meter coils are more cost-effective, saving £15,995 (13%) compared to 12-meter pipes over the 10,000-m batch.
Category management at its best
This case elaborates on the benefits of category management, which involves stepping away from the traditional product cost comparison and including lifetime costs. That requires a good understanding of the product characteristics and logistical and installation processes.
Eventually, we went from 6% cost difference in favor of loose pipes to 13% lifetime cost efficiency of 100-meter coils.
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