How Can Procurement and Finance Get a Safe Seat on the Commodity Roller Coaster?

In the past few weeks, Spend Matters featured a multi-part series on commodity management tips and tactics (Part 1, Part 2, Part 3, Part 4, Part 5, Part 6, and Part 7). And this week, we'll be publishing our first paper in the 2011 Compass Series dedicated to examining sourcing and commodity management. To say that commodity management is anything but a top priority for those involved in the direct supply chain in manufacturing organizations (not to mention retailer and other organizations impacted by shipping costs and fuel surcharges) would be a gigantic understatement. In fact, late last week, I gave a talk on how to factor broader economic issues and commodity trends into contract strategy and management at an IACCM event and a couple of audience members -- all non-procurement types -- approached me afterwards to confirm how important the topic is becoming in their organizations, impacting contract and vendor managers alike.

Yet the fundamental challenge is that markets aren't just headed in one direction. It's the volatility they present on both a time and geographic basis -- in other words, how quickly they can move in different directions as well as the variability of pricing from one region or country to the next. In the past week or two, downward price pressure has been the story of the day. Consider how, according to the WSJ, Oil fell 8.6% last Thursday to "$99.80 a barrel, the lowest closing price since mid-March." And "Copper, another closely watched economic barometer, shed 3% for the second day...[additionally] the latest swings came amid a weeklong nose dive in the silver market that accelerated Thursday with an 8% drop. As recently as Friday, silver was up 161% in a year, but it has lost a quarter of its value in four days." Or take major agricultural commodity performance at the end of last week: "cotton fell 4.5% and sugar fell 2.3% on Thursday, and are now down 23% and 41%, respectively, from their 2011 peaks." And remember those peaks occurred in the March timeframe, in most cases. Not long ago!

Now more than ever, procurement organizations don't just need a strategy to manage commodity volatility. They need to be able to explain to their stakeholders the rationale behind price movements in order to more accurately forecast where the markets they care about are likely to go. We might not be able to fully explain the unexplainable, but creating a point of view by digging into the fundamental drivers of commodity prices (e.g., supply, demand, macro-economic trending, speculation vs. end consumption, stockholding vs. production) is more critical than ever. At the same time, from a tactical investment perspective, we're hearing from more and more software companies and advisory firms that want to help clients embed pricing index data from sources like MetalMiner in their spend analysis and related spend data management toolsets. This is probably a good thing, but just knowing the current price alone will never be sufficient when it comes to structuring, implementing and managing better supply contracts.

Jason Busch