Procurement organisations today are increasingly examining how they can better model and predict commodity price risks. They are doing this for two reasons. First, they want to identify and address weaknesses in their purchasing process so that they can make their supply chains more resilient to external shocks. Second, they want to create smoother, more predictable forecasts for the whole business, which they can in turn use to inform strategic planning decisions and create better evidence-based projections for shareholders.
Why the challenge?
Managing commodity price risks is not a new activity within procurement: most enterprise-level organisations proactively monitor commodity prices related to the categories they manage and can often anticipate cost increases before they happen. Yet even when procurement knows a price increase in a key commodity is coming, whether from a supply chain disruption, producer capacity shortages or simply inflation, far fewer businesses are successful at mitigating the variance.
Why the inability to execute? Simply put, most procurement organisations lack the tools and resources to truly manage commodity price risks. Category managers can try to create their own forecasts with generic data from the web or by applying off-the-shelf, syndicated forecasts to their own products, but these options fail to address the volatile nature of commodity prices and their impacts on the business. And even with this patchwork approach or the one-time help of an outside expert advisor, procurement teams rarely have the time or the budget for additional resources needed to manage commodity price risks on a continuous basis.
The ideal solution
To solve this mismatch between board-level demand for commodity price management and procurement’s ability to supply accurate price forecasts, businesses must find a solution that offers the data and analysis needed without overtaxing procurement's already stretched resources. The end goal is to create a seamless extension of the procurement team that allows businesses to smooth — or even beat — commodity market volatility.
Spend Matters believes the ideal solution lies in our Commodity Volatility Management offering, which provides a dedicated commodity intelligence platform coupled with an expert managed service layer to support strategy and decision-making.
You can access the full report: Spend Matters: The case for managing commodity price volatility