The New York Times: Tackling The Commodities Price Rollercoaster

When The New York Times tackles an issue on the front page of the business section that's on the minds of procurement and operations executives, it shows how mainstream our jobs have become. Earlier in the week, the Times featured an expose on how rising commodity prices -- a frequent topic of conversation on Spend Matters -- are impacting countries, companies, and even individuals. The story begins by noting facts you probably already know but bear repeating: "The price of copper has tripled in five years. Zinc has doubled. Wheat and soybeans rose 70 percent in 2007. Futures prices of crude oil, gold, silver, lead, uranium, cattle, cocoa and corn are all at or near records ... A global boom in the cost of commodities, the staple ingredients of a modern economy, is entering its sixth year with no end in sight. Commodities have always been subject to boom-and-bust cycles, but many economists see a fundamental shift driving the markets these days."

From a Spend Management perspective, this "fundamental shift," as the Times describes it, is something that we should all pay significant attention to. Unlike the housing, financial or related "bubbles," it is difficult to argue that commodity prices are artificially inflated. The fact of the matter is that rising global demand -- in China, India, Central Europe, Latin America and beyond -- has outpaced available supply across a range of metals and energy categories. And food commodity prices are now directly correlated with energy prices since thanks to ethanol, we now have a choice of either burning or consuming what we grow from the ground (don't get me started on how inefficient ethanol is).

Given a looming economic downturn in the U.S., the article astutely suggests the double-whammy that U.S. companies and consumers might face -- a combination of stagnant or down economic activity compounded by inflation. The biggest potential danger here -- and the fundamental shift from dealing with past recessions and downturns cycles -- is that the U.S. can't directly influence or control inflation through monetary policy (because commodity demands and available cash outside the U.S. is what is driving overall demand versus domestic consumption). The Times succinctly notes that economists "say it will be hard to stop the ascent in commodity prices because it is connected more than at any other time in recent years to events beyond the United States, particularly the industrialization of China, and to a lesser extent of India, and in booming oil economies like Saudi Arabia and Russia."

So what can American -- and Europe, for that matter -- procurement organizations do in this type of environment? I could suggest a dozen strategies, but I'll put my top three on the table in this post. The first, which you've read on these pages before, is to change your overall philosophy from one of commodity-based savings to one of risk mitigation and management. In other words, lock-in downside commodity risk through hedging and other means, and quantify your overall global risk exposure. Second, think about how your organization can still achieve cost savings in non-commodity areas. This involves not only stripping out labor and other "value-added" components from negotiations, but also looking at hundreds of total cost factors, especially when global sourcing is involved (e.g., bidding out banks, 3PLs, negotiating for supplier-funded local facilities and on-site support, etc.) And third, recruit a new Spend Management workforce that has experience in thinking out-of-the-box to tackle such "fundamental shifts" as the Times describes. After all, the next few years are not going to get any easier, and as one futurist once remarked, "The future ain't what it used to be." So ask yourself the fundamental question: are you ready to change with the times?

- Jason Busch

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