Playing the (Price Arbitrage) Game

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Almost everyone knows the age-old adage, Buy Low, Sell High, with the possible exception of a scoundrel trader for whom I used to work. He practiced a Buy low, but do whatever you need to sell strategy. Although buying low and selling high is a rather duh concept, I always get a kick out of hearing how XYZ company offloaded some old nickel or copper they purchased before the markets went crazy. So this article suggesting that now might be a good time to sell off gold jewelry purchased several years ago made me chuckle. Playing the price arbitrage game can work for buyers and sellers of all sizes.

I once met with the VP of global purchasing for a middle market manufacturing group who suggested that metals prices (we’re talking about the raw materials here) are similar throughout the world. But this couldn’t be any further from the truth. In fact, the arbitrage opportunities for buyers are probably more abundant as commodity volatility increases. Simply put, the more the prices for metals gyrate, the greater the opportunity to take advantage of arbitrage. Perhaps we can find an academic who would be willing to run some regression analysis for us to confirm that last statement. As an example, if the market is going down and a domestic supplier sets his price using a trailing three-month average, while a Chinese producer is using a spot price to set his price, a buyer can take advantage of an arbitrage opportunity (provided the product does not involve complicated tooling or high switching costs). Of course, there are many other variables, including the buyer’s required lead time, quality requirements, etc., but if the purchasing organization develops and creates multiple supply options for a particular category, there could be some savings or cost avoidance opportunities.

In the meantime, it is tempting to consider a little profit from those old gold necklaces!

–Lisa Reisman

Comments (7)

  1. Jason Busch says:

    Based on experience, I think words like “arbitrage” intimidate a lot of category-level practitioners because they’ve not looked at their role from a higher-level, “trader” perspective in the past. Even globally, the sourcing role is still quite often practiced from a “buyer” frame of reference. But our profession needs to move in this upwards, higher-level direction. Keep pushing on these concepts. Everyone — from the middle market to the Fortune 50 — needs to better understand them.

  2. just me says:

    to consider purchasing agents as a “profession” where the employees are capable of high level thinking is laughable. Most agents couldnt tie their own shoelaces unless a supplier/bank did it for them. This post isnt even a joke, you’re the joke thinking the readers here could even begin to comprehend what you said.

  3. Rob Edwards says:

    Just me,

    Looking at this from a manu point of view with mulitple mechanisms and geographies for distribution I would say the jokes on you sir!

    Merry Christmas

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