Thanks in large part to rising oil prices, the cost of a number of commodities is continuing to increase. Purchasing recently noted that specialty gases, chemicals, and resins are costing a lot more today than they have in the past. Praxair, which is raising prices 10-30% for a number of its products, is quoted in the article as noting that the higher prices are needed to offset "rapidly escalating energy, fuel, and other operational costs, current supply/demand imbalances, and increases in the cost of capital goods to support customer product supply." Who is else is playing the price escalation game? Dupont's nylon standard resins will be up 20 cents per pound in July (among other price increases). And Dow is even putting customers on a supply allocation program for some commodities.
The good news is that even in this price escalation environment, companies have numerous sourcing options at their disposal. Price escalation/de-escalation causes are just one component (which can allow suppliers to sharpen their pencil on the value-added components of what they’re producing or supplying). In addition, as I've written about numerous times before, hedging -- perhaps not the exact material, but a proxy such as oil -- is also an option to mitigate against future price increases. Also, companies should open their search for commodities on a global basis, investigating both local and overseas options. Depending on the price points and weight/shipping requirements -- not to mention local availability -- the offshore option might begin to make more sense as commodity prices can often differ from country to country. One of the keys, however, is to make sure it appears that you're sourcing for local consumption. This improves the chances that the local price -- not an export price -- becomes the entrance point to begin a negotiation.
- Jason Busch