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Beyond Sourcing and Supply Chain: Commodity Management Solution Fundamentals — Understanding Approaches for Pursuing the Most Volatile, Critical and [Often] Largest Component of Company Spend

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 typical discrete manufacturers, food and CPG companies across the globe are just beginning to address the structural changes they must make towards their organizations and procurement/supply chain orientation to thrive in the new market environment.

Moreover, 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 to which companies have been exposed 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.