Let there be no mistake – commodity volatility is a huge opportunity for today’s crop of procurement chiefs. Yet, even some of the most sophisticated purchasing organisations are looking nervous in the face of margin-eroding raw materials costs. So what do they do?
In short, they will have to get to work. Treacherous commodity markets aren’t a recent phenomenon – look at prices back in 2008 and you can see why what some procurement organisations were able to do in bringing about vital cost savings in the face of high material prices was so impressive.
But, actually, was it? Much of what was achieved then was prompted by businesses realising they had an urgent need and then developing procurement capabilities which they could then use to squeeze suppliers and harvest what you often hear referred to as ’low-hanging fruit’. It was something of a harvest for procurement functions – they could go out and do the basics well and they earned recognition as a result.
Today’s situation is different.
Procurement is competitive – It’s not pushing it too far to say that functions have developed greatly since 2008. Many groups have access to greater areas of spend, invested in talent, built bridges with stakeholders, grown their supplier relationship strategies, and so on. Which is not to mention the advances that have been made in hedging tools and forecasting in order to manage commodity costs. It’s fair to say, that if commodity prices remain aggressive this year, how far the function has developed will have a key role to play in how well equipped a business is to mitigate the price rises.
We reported a short while back on Georg Fischer’s clever combination of supplier and customer-side strategies to avoid what they saw as risk in the prices of rare earth metals – when you look at what businesses are doing to mitigate the risk of material price rises, it’s clear that intimidating suppliers won’t be enough to stay competitive.
The only way is up – The recent price trends are as troubling as they are inevitable. Oil is now sitting quite comfortably around $120 a barrel, especially concerning when you think that even a year ago, certain key industries were fretting about $100 a barrel. They’ve been here before, but the confluence of positive economic data coming out of the US and emerging markets’ relentless growth slog could signal much greater prices are ahead.
No wonder that a move like Delta’s acquisition of a refinery starts to become more credible. Oil costs for them are huge and it’s reasonable to view this investment as a reaction to the anticipated price of crude oil, even if the circumstances were more complicated than that. There are plenty of signs to indicate that 2012 could put other recent period of volatility in the shade.
The risks aren’t clear – Even more so than 2008, global supply chains are proliferating and layering complexity upon complexity onto companies’ risk profiles. I was speaking to Professor Alan Braithwaite, visiting professor at Cranfield and executive chairman of LCP Consulting, this week and he was adamant that the majority of businesses weren’t up to the challenge that supply chain complexity presents.
The earthquake and tsunami in Japan or the flooding in Thailand might be obvious examples of how physical events exposed both the vulnerability to risks that existed in certain industries, but also how little purchasing organisations knew about their own exposures. The same is undoubtedly true of the price risks that come with commodity spikes. If oil shoots up, businesses will have a struggle on their hands to understand where businesses in their supply chain will suffer and what their demise might ultimately mean for their business.
Speaking to procurement chiefs about the potential impact of commodities in 2012, the reactions vary noticeably. Some are worried, some are accepting of the inevitable, some are even optimistic that this will herald something of a golden age for cost reductions (Tom Linton, CPO of Flextronics argued as much here).
A recent, very popular thread on a LinkedIn discussion asked ’what is procurement’s most important value-add?’ I’d argue that if a buying organisation isn’t able to make an impact on the cost of raw materials over the coming months, the rest may not matter.