Ahead of a webinar panel discussion on 18th April, we invite Triple Point Technology’s Michael Schwartz to explain in this guest post why commodity management requires a more sophisticated approach.
Commodity management is the next big thing, but is procurement ready?
Did you see the recent headline: Samoa Air to price tickets by passenger weight? All jokes aside, the underlying logic for the pricing change is so Samoa Air can find the best way to manage jet fuel costs. Each pound shed from a plane saves the company 14,000 gallons of fuel each year. At roughly $3.03 per gallon, that’s $42,400 per year that drops to the bottom line for every one pound reduction.
Analysts have been bifurcated in their opinions of Samoa Air’s new pricing scheme with some thinking it’s a brilliant idea and others that believe it can’t work. I’ll leave it to the pundits to debate the pros and cons of the best way to price airline tickets, but the urgency of finding new ways to manage commodity risk is not at all surprising.
To preserve margins, manufacturers must move quickly to approach commodity procurement differently and more proactively than ever before. While not traditionally viewed as commodity trading organisations, manufacturers can learn from leading commodity-trading houses and adopt new processes, tools, and measurements required to optimise raw material acquisition while ensuring compliance with new regulatory demands.
It’s not just airlines that have the daunting task of managing commodity input costs such as fuel. Faced with fundamental changes in the commodities and energy market environment, most manufacturers, including beverage, food, CP, chemical, and industrial, are wrestling with the best approach to protect margins from volatile and rising commodity costs.
The risk runs a wide gamut of costs including energy to run plants and distribution fleets, raw materials that are inputs to products, and packaging for finished goods (e.g. aluminum, cardboard). Commodity costs are a major percentage, and the most volatile, of a manufacturer’s spend.
Consequently, it’s shocking to find many companies that manage commodity risk in spreadsheets.
Today’s complex and volatile markets require Procurement to use sophisticated software tools to not only ensure coverage, stay within budget, and deliver the material when manufacturing needs it, but also to analyse commodity risk and perform scenario analysis.
The new benchmark for procurement organisations is how well spend is managed relative to market prices and competitors, not just how well the budget is managed.
As I said, commodity management is the next big thing…
Michael Schwartz, SVP, chief marketing officer, Triple Point Technology