Are you Among the 39% of Companies That Mitigate Inflationary and Commodity Cost Increases?

We recently came across an insightful report from The Hackett Group, titled "Input Costs: Taming the Inflation Dragon" (download the PDF if you're so inclined). We've been writing extensively on Spend Matters of late about commodities and how they're tied to everything from sourcing strategies to an entire 6-part series on what companies are doing to stay on top of commodity risk. Hackett's report digs into today's current input cost inflation levels and their linkage to commodities like crude oil and especially metals. Their research found that "over 60% of companies believe they can anticipate the cost increases, but only 39% have been successful at mitigating them." The report ominously goes on, "This disconnect is cause for worry because, while inflation may eventually subside, volatility is here to stay" and that these rising prices could cut corporate profits by up to 9% -- the equivalent of $150 million for a typical Global 1000 company."

Hackett suggests that CEO/CFOs must now pay increasingly close attention to the link between global monetary policy (the report points to China's pegging of the RMB to the US dollar and the US Fed's quantitative easing program, specifically) and the interaction of input cost inflation with increasing global consumer demand. "The combination of this 'demand pull' with the 'cost push' of commodity price inflation (i.e. hydrocarbons, metals, foods, etc.) is creating a surge in corporate input costs," according to the report. So what's the bottom line? Two things: first, it's imperative to consider the entire global picture now, as anything from political unrest in the Middle East to the disaster in Japan "only exacerbate the price increases." Second, "the short-term magnitude of the price hikes is only half the story. The other half is their variability, i.e., volatility."

Which industries are feeling the biggest brunt? Manufacturing, aviation, and others who rely on volatile raw materials with a limited ability to pass rising costs onto consumers are finding it difficult to plan for volatility, and "companies with the largest commodity purchases face the largest test." Furthermore, the report suggests that as expiring contracts are recalibrated to current market conditions, that organizations will become more hesitant to enter into long-time agreements at current market prices, therefore exposing "themselves to higher downside in equal measure to any potential upside available in a spot-market approach."

The report then dives into the drivers of purchased-cost inflation, and the fragmented approach companies are taking to "anticipating and mitigating cost increases." For a look at the technology and techniques more advanced companies are using around sourcing and commodities, check out the latest Spend Matters Compass Research: A Foundational Look at the Evolution of Sourcing Technology and Platforms
and Advanced Sourcing Technologies and Platforms to Broaden a Portfolio. And take the time to download and read The Hackett Group's report as well. It offers a fascinating outlook on a volatile global market based on real-world data, and suggests some long-term solutions for a critically important area to track and continually monitor going forward.

- Sheena Moore

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