Should Moderating Energy Prices Impact Category Strategies?

Since returning from China last week, I've spent the better part of my time back in the office digging out from under a pile of work. But finally, I caught up, and I've had the chance to scan through my familiar trade and business publications again. This morning, I caught up by reading an article in Forbes that described how, "inflation slowed sharply in February as food costs moderated and the price of gasoline, natural gas and other energy products posted big declines ... The moderation reflected a 1 percent drop in gasoline pump prices, a 2.8 percent fall in home heating oil costs and a 4.5 percent drop in the price of natural gas, which was the biggest decline in more than four years." Now as any economist will tell you, a single month of data is a point, not a trend line. But if these points become trends, it might be a good time to go back and evaluate how you're sourcing some basic categories. To wit, here are a few sourcing ideas that you might want to consider:

1) If you're sourcing freight and transportation categories, and you've paid surcharges or increased pricing in the past year, consider re-bidding categories with a competitive supply base, and let the market determine pricing, as energy costs decline.

2) For petroleum derivative categories (such as foam and resin), consider an aggressive direct negotiation with your current supplier, especially if they raised prices during the upturn in commodity pricing. Threaten competitive negotiations (and reverse auctions) if they are not responsive. And force them to separate out labor and material costs in their price quotations, to ensure that they're passing on savings.

3) For energy pricing, take a close look at volatility and futures contracts. Consider floating a greater percentage of near term purchases, while locking in a percentage of longer-term buys through smart hedging strategies.

These are just a few of the ideas that I kicked around the office this morning. Nothing definitive, but as pricing power returns in basic commodities to buyers, it's worth reexamining some basic category strategies to stay on top of the market.

Jason Busch

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