Few things in life are guaranteed, but increased prices do not have to be one of them.
There are few commodities, if any, in which pricing has trended downward over time. Outside of unforeseen events, such as changes in the economy and world events, there are often pressures created by producers that lead to pricing volatility. Unsurprisingly, any one or more of these factors is in play at all times, with the result of driving higher prices and increased returns.
Think about electricity prices 10 years ago. They soared once electricity was placed on the open market. Over time, the price has slowly eroded as a result of government subsidy, reduced demand and increased supply. If we look at electricity prices today, they are once again climbing for reasons not clearly understood or predicted during the past decade.
If your company purchases commodities, or any product that relies directly on the consumption of a commodity, then you are exposed to rising prices. To reduce this exposure and improve profitability, hedging and price offsets are necessary, all of which make up part of an effective procurement strategy.
Here are five steps to develop an effective procurement strategy for commodity price protection:
Build a strategy using the above techniques, and you will have greater confidence in the longevity of pricing, thereby mitigating risk and protecting the financial viability of your organization.
Shawn Casemore serves on the board of directors for the Ontario Institute of the Purchasing Management Association of Canada (OIPMAC) and contributes to the advancement of the profession through his teaching with Humber College in the supply chain program. His experience in supply chain management includes leadership roles with companies such as Magna International, Arvin Meritor, N.C.R. and Bruce Power. E-mail Shawn with any questions or comments.
About this blog
From basic commodities to complex services, Purchasingb2b’s Procurement Value blog will provide you with best practices and tools to make your purchasing department more cost-effective, strategic and efficient. For more information on contributing to this blog, contact the editor.