Heavy users of raw materials face a huge challenge. The prices of many of the world’s key commodities reached all-time highs last year, and volatility across the markets was more than enough to create huge problems for companies in the industrial manufacturing and consumer products industries.
It’s easy to find startling examples of price volatility in every category from arable crops and metals to timber, oil, and chemicals. And it’s also easy to see the consequences of such volatility in companies’ bottom lines – time and time again, there are stark reminders that sharply rising raw material costs can impact profitability.
For example, spice and condiment manufacturer McCormick saw first quarter profits hit by 3% because of higher than expected raw material costs. And Swiss agribusiness company Syngenta cautioned that its 2012 results would be impacted for the same reason.
According to a new white paper on Commodities Management from Procurement Leaders, there are several ways to fight back, including hedging, forming strategic supplier alliances, and leveraging advanced technology solutions. The paper provides a good primer on the subject, and discusses how companies including Unilever have successfully controlled skyrocketing raw material costs. Read it now.
Automotive World published an excellent article on the impact of rising and volatile raw material prices on the automotive industry.
A couple of weeks ago, I noted that commodity volatility had hurt Ford’s third quarter earnings. This article makes the point that raw material prices are creating difficulty for the entire supply chain.
“Materials suppliers struggle to make a profit; Tier suppliers and OEMs find themselves torn between raising prices and suffering the cost increases. Ultimately, it is the end-consumer who bears the brunt of increased finished product costs. The automotive industry is particularly sensitive to price rises, especially in emerging markets and in budget and cost-sensitive segments, where the equivalent of a €200 or US$200 sticker price increase can stop potential buyers setting foot on a dealer’s forecourt.”
Woven throughout the article are quotes by industry insiders that add rich supporting material. Dr Dieter Zetsche, chief executive, Daimler AG states, “We told the financial markets at our annual press conference that Daimler as an entity will see an increase in raw material prices in 2011 of about €700m (US$963m) versus 2010…On the car side there is very little chance to pass over what comes in from the raw material side.” Tim Bowen of Dow Automotive adds, “From our perspective, this appears to be the new norm. We are going to be operating under this escalated cost structure for years to come.”
The editor asked Triple Point for its views on how automotive purchasing needs to change. It feels a little odd to quote yourself, but here it goes: “According to Triple Point’s Michael Schwartz, ‘Automotive companies have some of the most diverse and complex procurement portfolios, which represent equally complex supply networks and a broad series of commodities markets – any one of which can be experiencing severe volatility at any given moment.’ The choice, he says, ‘is stark, but clear: continue to purchase commodities passively as just another link in the supply chain and be vulnerable to huge commodity price; or adopt a proactive approach to commodity procurement that utilises solutions that enable more accurate forecasts and protect the bottom line.’ By using the ‘right approach, tools and risk management set-up,’ vehicle manufacturers can take control of their commodity supply chains. Fail to do this, says Schwartz, and ‘that’s when the commodity supply chain controls you.’”
Here’s a link to the full article. It’s a long article but certainly worth the read.