How Low Commodity Prices Expose Procurement to New Risks

low commodity prices James Thew/Adobe Stock

A flood of foreign imports and a resilient dollar have depressed commodity prices for the past two years. For many procurement organizations, this may seem like an ideal moment to renegotiate contracts and secure unexpected savings.

What lies beneath this opening, however, can wreak havoc on procurement. For every opportunity these depressed market conditions create, they reveal just as many new risks — ones procurement can rarely manage to full effect without the help of predictive analytics.

Consider your suppliers. Cheaper commodities may mean lower purchase prices for you, but for your suppliers, that means lower sales price and thus a hit to revenue. Constrained finances for your suppliers could negatively affect their performance. You may be getting their products at a lower cost, but those same products could end up being of lower quality, delivered late or even out of stock. And if the hard times continue for your suppliers, they could even go bankrupt.

Now instead of savings, you have a supply disruption.

Clearly, lower purchase prices can mask the real threats procurement needs to defend against. When capturing savings is your ultimate goal, it can be easy to forget that your organization’s historical purchasing performance is one data point relative to an entire market.

Unless you have performed both a total cost analysis and a market analysis of all of the underlying input prices — including commodity prices, labor rates and energy prices, to name a few — you can’t fully understand how well your purchasing strategies perform. Commodity prices may be low, but they are also volatile. If you put yourself at the mercy of market volatility, you put yourself at risk for more purchase price volatility — and for passing that volatility on to your customers.

But even worse than ignoring these examples — just two risks of many more — is ignoring your organizational mindset. Understanding the full complexity of your supply relationships allows you to become a predictive organization instead of a reactive one.

This is where analytics comes in. Platforms based on machine learning can help better predict adverse risk effects and risk drivers like the impact of low commodity prices on supplier risk, as well as yield actionable insights in other areas.

Procurement must avoid falling into the trap of linking a lower purchase price with success. Instead, it should provide the business with the capability to manage change in supply markets — and to link that capability with improving the firm’s products and profitability.

Want to learn how to do that? Join us on Thursday, April 28, at 11 a.m. CDT, for our webinar exploring the risks falling commodity prices present for procurement, how to use data to turn these risks into opportunities and why analytics are essential to enabling your risk management strategy.

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