We're excited to announce Spend Matters' first dedicated research brief focused on commodity management: Beyond Sourcing and Supply Chain: Commodity Management Solution Fundamentals -- Understanding Approaches for Pursuing the Most Volatile, Critical and [Often] Largest Component of Company Spend. You can register and download the paper for free via the previous link. Commodity management is a topic capturing increasing attention by boards of directors, management teams, procurement executives and category managers alike. Yet the march to embrace commodity management is something new for procurement, especially outside the CPG and food markets, where organizational sophistication has tended to be more advanced than in discrete manufacturing environments.
Yet today, organizations with exposure to commodities like energy, paper/packaging, metals, ingredients, plastics, chemicals or other traded -- and non-traded -- commodities are starting to pay more attention to the area. Indeed, procurement executives who previously ran programs driving indirect and services procurement spend category cost savings, and direct programs to identify, qualify and implement global suppliers, now find themselves scrambling to renegotiate with suppliers who will no longer honor contract pricing terms. Yet placing the blame on a single area is difficult. As we've observed before on Spend Matters, this rather dangerous commodity concoction is not made from a unique ingredient. A number of factors have contributed to volatility and rising commodity price pressure, including:
- Seasonal supply shortages (e.g. poor staple/food harvests in the spring/summer)
- Traditional speculation (e.g. precious/semi-precious metals)
- New forms of speculation (e.g. ETFs)
- Global emerging market demand (e.g. China)
- Demand and order uncertainty
- Trade concerns and capacity limitations in certain supply markets
- China activities (e.g. VAT rebate changes, export tariffs), WTO rulings, etc.
- Natural disasters (e.g. hurricanes, tsunamis, earthquakes, flooding)
- Man-man disruptions (e.g. port shutdowns -- labor unrest, Occupy Wall Street protests)
- Political and military upheaval and uncertainty in North Africa, the Middle East and Iran, etc.
Besides the numerous factors impacting the supply side of the commodity equation, the demand side is causing, arguably, a different type of persistent headache -- a giant shift where there is no looking back. It is impossible to escape the structural shifts caused by a booming global population and the rise of the middle class across countless emerging markets, which creates a new consumer class that is putting greater and greater demand on supply chains. According to World Bank data, the global population was roughly 3 billion in 1960. Today, it is over 7 billion, and based on the UN high estimate, by 2100, the Earth will pass 14 billion humans. To put this in context, in 1800, the global population was under 1 billion.
Yet manufacturers, food and CPG companies across the globe are just ramping up to support these structural changes. And even advanced procurement and supply chain organizations still often put commodity volatility on the investment back burner in comparison to other areas. Spend Matters has observed increasing buying levels almost universally across industries at double-digit growth levels for purchase-to-pay (P2P) investments, strategic sourcing and unit cost reduction technology investments, supplier risk management tools and collaborative forecasting, scheduling and planning solutions, just to name a select few.
In short, precious investments in technology solutions and skilled resources have largely gone toward other areas of the business rather than being allocated towards efforts to control, mitigate and manage commodity risk. Even though for certain industries, commodity management volatility has been the number one driver of P&L performance, the art and science of managing it has largely been left to antiquated spreadsheets. Moreover, ERP has played virtually no role in helping the commodity management cause, as SAP, Oracle and PeopleSoft systems historically have not been able to address concepts such as market prices, market curves and related accounting, planning and scheduling requirements that bridge financials, physicals and suppliers.
Of course, the larger tragedy on the corporate buying stage is the overall P&L risk companies have been exposed to due to a lack of a defined strategy and consistently monitored programs. The impact of commodity price fluctuations on actual P&Ls can be massive, with organizations observing radical fluctuations in prices (30-40%) versus more typical in-band movements (5-10%) annually. Now is the time for organizations to make the right set of investments in commodity management solutions -- not to mention people, process and market intelligence. Learn how to get started -- and where to focus -- in this Spend Matters Perspective. To learn more, download: Beyond Sourcing and Supply Chain: Commodity Management Solution Fundamentals -- Understanding Approaches for Pursuing the Most Volatile, Critical and [Often] Largest Component of Company Spend.