Is the commodity price environment today different from the past?

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commodities.jpgIn short, Yes.

A new higher cost profile has been placed under many commodities, says John Mothersole of economic analysis and forecasting organisation IHS.

“Volatility has increased significantly - and is likely a permanent feature of supply chains,” says Mothersole.

This raises the need to not only track commodity prices, but also the corresponding factors that drive those prices. He advises that organisations:

  • build a cost profile of their key materials;
  • identify key production centres and raw materials exporters;
  • be aware of changes and potential changes in policy;

Furthermore, be prepared for volatility – consider formal hedging strategies (if not already in place) so that your risk management strategy is more routine than reactive.

Suppliers can add to the volatility

The biggest concern associated with suppliers is delays and disruption in the supply chain, with quality and cost following closely behind, says Katie Lewis, also of IHS:

  1. Supply delay / disruption
  2. Quality
  3. Cost
  4. Reliability
  5. Environmental Compliance
  6. Counterfeit risk
  7. Supplier Bankruptcy

Lewis advises partnering with your suppliers – it yields better results than combating them.

Supplier Partnering.pngYour supplier management process must include assessing the impact of a disruption of the supplier relationship and this should influence the relationship with the supplier going forward, which can be loosely classified as [see image alongside]:

Substitute Available - Highly competitive commodities and parts. Consider strategic timing of buys, effective contract negotiation and benchmarking means cost savings.

Bottleneck - For lower value, but still integral inputs coming from a short list of suppliers, close inventory monitoring is required.

Partner - For the most integral and high-value inputs to your supply chain, grow strategic partnerships with your suppliers.

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