I have no affiliation with Oliver Wyman, yet find myself again agreeing with their outlook on the future of physical commodities. They claim that volatility is "the new normal" in commodity prices, and to reduce earnings volatility, procurement chiefs need to create transparency, optimise risk/return and share the risk.
The question that remains, however, is how?
Technology, of course, is the answer. Not simply improved inventory and order tracking software, but online solutions for the negotiation and trade of physical commodities.
Suppliers are holding on to whatever opacity is left in today’s market. The smaller the buyer you are, the more margin opportunity for them, and it’s no secret that today’s major trade houses seek to protect profits in their asset businesses.
Elsewhere, there’s a misconception that physical commodity transactions are too complex for anything except phone brokerage. You’ve probably seen systems that are nothing more than automated bulletin boards and RFPs (tenders). A viable system, however, will offer you instant price discovery, optionality and cost efficiency.
Of all players along the supply chain, you have the least leverage today and the most to gain from the transparency and optionality that technology provides. If suppliers don’t like the price, they can store it. Your operation, however, probably doesn’t provide significant warehouse space to draw on stocks when nearby supply is tight.
Here’s a quick example on optionality: Seller1 is offering raw materials at $100/MT delivered to your plant. Seller2 offers it at $60/MT at the distribution center, which will cost $30/MT delivery charges. With technology, these procurement decisions can happen in seconds, not over a series of phone calls, voicemails, emails, etc.
On our present course, the odds of physical commodity regulation in both the US and EU are high. Yet commodities are not as liquid as financial markets and too much regulation could seriously threaten liquidity. Perhaps a little transparency with online trading would be just enough reporting to thwart price manipulation (benchmarking) as well as burdensome regulation.
So where do we go from here? The answer is to build a corporate online procurement strategy. Here’s some thoughts on how:
Every week we see more headlines signaling that online trading is coming in the physicals. With a forecast of increased competition among your suppliers, a proactive approach will surely keep you competitive.
Julie Lerner is CEO of PanXchange., formerly CMDirect.