Tackling Commodity Management Within Procurement – Beyond the Oil Crash

Because of our work tracking, analyzing and forecasting industrial metals prices, commodity management is something we spend quite a bit of time thinking about at Spend Matters and MetalMiner. But too many procurement organizations only give it enough consideration when there’s a crisis – positive or negative. In the February issue of Surplus Record, Lisa Reisman and I penned a column that covers some of the basics of creating good commodity management strategies for procurement. We’ve also linked quite a bit of our Spend Matters PRO coverage and other site commentary on the topic at the end of this post.

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Among other strategies in our most recent column, we observe that, “Reading trends and price direction and mapping this to a buying process is possible with reasonable consistency.” But, “Forecasting a specific price point at a future date is fool’s work. Buying and inventory management strategies for commodities should be predicated on having a perspective on market direction and reading the indicators on when to buy and when to hedge.” In other words, strong technical analysis of underlying markets or statistical modeling processes (when technical analysis is not possible) is useful only to a point – to help determine trends and price direction.

Another observation we make is that, “Commodity management is everyone’s work.” As such, “It is important to involve your management team” and “the board (if they have expertise).”  Moreover, “Talk to suppliers, subscribe to forecasting services and develop a perspective that is informed by multiple frames of reference,” we suggest. Commodity management also does not have to mean having a formal hedging strategy. Having producers, distributors or other suppliers hold raw material pricing over a longer-term timeframe (for a likely premium) or having escalation or de-escalation clauses within contracts for commodities is also a form of managing commodity volatility, especially if costs or savings, in the latter case, can or must be passed onto end customers.

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