Tackling Volatile Commodity Prices to Improve Profitability
In today’s dynamic market space, it’s extremely surprising to see that the price of the final product is almost always constant even when the raw materials, services, and other commodity prices are fluctuating so often. Procurement managers are always on the lookout for sourcing materials at the lowest cost, but sometimes end up buying even when […]READ MORE >>
In today’s dynamic market space, it’s extremely surprising to see that the price of the final product is almost always constant even when the raw materials, services, and other commodity prices are fluctuating so often. Procurement managers are always on the lookout for sourcing materials at the lowest cost, but sometimes end up buying even when the price is high to meet the production schedule. However, by assessing commodity price volatility and adjusting sourcing strategies, procurement managers can improve the company’s profitability. Adjusting the sourcing strategy does not mean making bulk purchases when the prices are low as it may lead to wastages.
Risk Mitigating Strategies to Tackle Volatile Commodity Prices
Futures Procurement Contract
One of the best ways to mitigate risks arising from commodity price volatility is to sign a legal agreement to buy a particular commodity at a predetermined price at a specific time in the future. Futures contract is widely practiced in the oil and gas industry alongside other commodities such as industrial metals, precious metals, seeds, livestock, and grains. This allows the company to manage their risks from fluctuating commodity prices and have more predictable revenue.
Keep Track of Price and Technology Trends
Companies don’t always have the luxury to mitigate increased commodity prices to their customers. Major commodity prices can be tracked and predicted based on historical data and upcoming trends. Apart from using the standard forecasting tools, observing the current market trends, the world economy, and other substitutes can prove to be a good indicator to predict commodity prices. For instance, increasing coal prices, development of renewable energy sources, and China’s production capacity can be speculated to estimate the price for aluminum.
Procurement managers who are unable to mitigate their risk arising out of volatile commodity prices could revert to product and services bundling with a trusted supplier. Bundling products or services together helps stabilize the final price of the particular commodity so that managers can keep the price of the final product stable.
Price Forecasting Models
The advent of big data has empowered purchase managers with an immense amount of data and information. With proper prediction and analysis of factors that influence the commodity prices, an accurate prediction of future commodity prices can be made. Based on this information, purchase managers can make bulk purchases or defer the process to improve overall profitability.
For expert advice on management of volatile commodity prices:
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- E-Sourcing: An Essential Component in Devising a Good Sourcing Strategy