As I was driving my kids to school this morning in Chicago, I passed a local Walgreens bearing a large digital sign that proudly flashed a message something like: "Get your H1N1 vaccine -- available today." Two months ago, there was a mad rush on H1N1 vaccine in Chicago. The vaccine was impossible to get unless you had a connection (which in Chicago is usually only one campaign contribution away), or wanted to wait in line for half a day. But now it seems there's so much of it that the government and health authorities can't give it away (despite the fact that only a minority of the U.S. population is vaccinated, including many high-risk groups). H1N1 vaccine succumbed to the classic bullwhip effect: demand spiked, supply could not keep up, and many early potential consumers ended up disappointed. Yet only a couple of months after peak demand, we're awash in excess capacity (much of which could expire before we have a chance to use it). This is very similar to the bullwhip effect that Caterpillar is preparing for with its suppliers as orders begin to ramp back up this year. And it won't just be suppliers that struggle to meet demand; commodity prices potentially will spike as well, paving a volatile path throughout the year.
Over on Spend Matters affiliate blog MetalMiner, Lisa Reisman captures the essence of the volatility in commodity price that many companies will face in 2010. Lisa writes that It's important for procurement organizations to remember "the substantial price risk that occurs when a supply chain(s) undergoes a bullwhip effect. As we at MetalMiner have started to complete our price predictions for key metals for 2010 ... we know that some of these price jumps in certain metals relate to re-stocking activities (e.g. once a company has burned through its inventory it has nothing to do but purchase materials, parts and assemblies for production) and not necessarily underlying demand. We believe this activity helps explain what has happened to steel prices in the last 30-45 days -- the mills have raised prices because companies have to replenish inventories and re-stock."
Lisa also comments, "based on my recent discussions with various steel industry participants, I can't help but get the feeling that folks have a very bullish outlook in terms of steel prices … [but] whereas small upticks in demand can and will have profound impacts on pricing, I remain rather cautious about the overall state of industrial demand. These re-stocking cycles will only go so far. Eventually, real demand will need to take over. In the meantime, get ready to ride the pricing roller coaster. We think it will be an up and down ride in 2010!"
Much like the capacity, demand, and supply swings around the H1N1 vaccine in only a matter of months, commodity prices will face similar volatility in 2010. In coming months, we could even see companies put on allocation. If there's some good news in this, it's that when it comes to commodity prices, it's really not a life-or-death situation -- at least, not on a human level. Still, we could very well see some procurement organizations commit corporate price suicide by failing to factor capacity and volatility into their 2010 sourcing strategies. Are you ready for the "commodity roller coaster," as Lisa puts it? If not, it's time to strap on your seatbelt and get ready for the ride. Tell your shareholders and customers to do the same while you're at it.