Technology and Process Tips for Dealing with Metals and Commodity Volatility

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Sourcing Strategies

I spend quite a bit of time interviewing both practitioners and consultancies about the latest they’re seeing and hearing in a range of sourcing and supplier management areas.   And what’s clearer to me than ever before is that despite the significant new sourcing and procurement investments that many companies have made in the past 18 months in areas such as e-sourcing, spend visibility and supplier management, few organizations have done much to address volatility in commodity practices from a technology and process perspective. In the best of cases, organizations have become more vigilant about deploying price indices periodically, pegging portions of contracts to underlying commodity prices. But this is truly still an outlier vs. a best practice.

Moreover, even those few organizations that rigorously use price indices actually capture such information in underlying contract management, invoicing and payment systems, making it difficult to translate their good intentions to positive outcomes in a systematic way. Because of this and because of what’s clearly become a speculative commodity bubble in certain base, rare and precious metals based on investment and speculation rather than pure demand I’d argue that metals buyers would be well served to put on a commodity flack jacket to prepare for the upcoming exploding shrapnel that could be headed their way as the markets which they depend on everyday continue to behave in irrational sourcing ways. That is, unless they’re prepared to take evasive action. Immediately.

What actions would be on the top of my list? Depending on overall commodity exposure on both the tier one and sub-tier levels, I’d start by mandating a price index policy that forces organizations to document and separate out underlying material costs from other value-added areas at all levels in the supply chain. I’d also find a way to collect this information in something other than excel, so that when companies and suppliers provide reporting data, it’s in a format that companies can roll-up and collaborate on. Moreover, I’d suggest capturing price index information in automated ways on a continuous basis for contracts that depend on it within core transactional systems (in an SAP contract object, for example). Ideally, you could also tie this data into other electronic invoice, presentment, and payment systems, prohibiting, for example, authorization to pay a supplier invoice that was over and above what it should have been based on a price index parameter (captured independently of the supplier itself). Such a model could also generate automated charge-backs as well.

Stay tuned for further tips from time-to-time in this area as well. And if you decide you really want to geek-out on a regular basis with how technology might apply to metals and other buying activities, mosey on over to my corner of the procurement and supply chain universe.

Jason Busch

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