Developing a Definition For Procurement: What is a Commodity?

During his presentation yesterday, Segmenting the Procurement, Commodity Management and Supply Chain Landscape, Pierre Mitchell started his talk by asking the question to the group: What is a commodity? Is it…

  1. A marketable item produced to satisfy wants or needs?
  2. Another name for a spend category? (“Category” = “Commodity”)
  3. A lower level of spend category rolling up to higher level?
  4. A class of goods without qualitative differentiation across suppliers in a market (high availability of substitutes)?
  5. Stuff that comes out of the ground and is actively traded in exchanges, such as food, metals, hydrocarbons, etc.?
  6. Some combination of the above?

 

The answer, of course, is that the definition is always in the eye of the spend holder (and the business for that matter). Moreover, as Pierre said, going back to a 30-year-old observation, commodity management processes differ based on the nature of the supply market (source: McKinsey, 1983).

Most important of all, commodities impact businesses. And stock prices. And competitive advantage (and disadvantage in the market). Yet most companies don’t focus enough on managing commodities (and direct spend, generally) as they would indirect. Just reference the 2012 PepsiCo quote: “We have no idea what the commodity markets are going to look like in 2012 and beyond.”

But rather than throwing up our arms and waving the white flag, perhaps it makes the most sense to take a step back and start by defining what a commodity is to procurement and the business – and what it is not. As Pierre said in closing, “Commodity does not mean simple.” Indeed, it does not. But defining and tackling commodities inside procurement is indeed “massive” and can provide “job security” to procurement, as Pierre joked.

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