I’ve long posited that in the future, commodity procurement groups in manufacturing companies will be measured against the market and competitors — not by budget alone. Measuring to budget makes sense in a stable price environment, but as noted in a previous blog post (Top 3 Commodity Management Challenges for Manufacturers), commodity volatility is one of the major challenges facing procurement groups. Prices of commodities, and therefore the raw materials and sub-components that consist of commodities, are extremely volatile.
Mondelez, the manufacturer of brands such as Oreo, Cadbury, Sour Patch, Dentyne, Halls, and Chips Ahoy announced earnings a couple of weeks back. A NY Times article covering the earnings report noted:
“Mondelez, like other companies with large confectionary businesses,
has faced higher costs for two of its chief commodities, cocoa and milk.
The company tried to pass its higher prices on to consumers,
but the strategy was met with mixed success.”
(Source: The New York Times)
The Mondelez press release stated, "The decline in volume/mix was largely due to price elasticity, a slow response by competitors to higher input costs and the impact of significant price-related customer disruptions that are largely resolved."
The traditional response to commodity volatility is to raise point of sale prices. But what if instead of raising prices, competitors adopt the latest commodity management processes and CTRM software tools? In that case, it isn’t "a slow response by competitors to higher input costs," but a purposeful competitive strategy. It leaves companies such as Mondelez, in this case, in quite a predicament – raise prices and potentially lose share or hold prices and take the margin hit.
Manufacturing commodity procurement is changing from a static "buy and measure to budget" to a dynamic process of managing and measuring to the market. The extreme volatility in commodity prices is an opportunity for raw material procurement to become a competitive weapon. At Eka, we are seeing forward thinking organizations adopt our InSight CM - Commodity Planning and Procurement solution.
This is not the business environment to wait and see — now is the time to take decisive action!