Too many manufacturers are using older technology, even spreadsheets, to manage commodity risk. They are either ignoring the fact that the world has changed around them, or hoping for a return to an easier past of less commodity volatility and complexity.
By not taking advantage of the advanced analytics offered by next-generation commodity management software, manufacturers are putting the future of their business in jeopardy.
But what are the main challenges facing manufacturers who use raw materials to produce end products?
1) Commodity Volatility, Volatility, and Volatility
Today’s markets are tougher than they have ever been. Prices of commodities, and therefore the raw materials and sub-components that consist of commodities, are extremely volatile. And these treacherous markets get much tougher without the right toolkit.
2) Increasing Demands for End Products
The market fundamentals tell us everything we need to know. Demand for finite resources is going up driven by a growing population and middle class in developing parts of the world.
As demands for the end product go up, so too do demands for constituent materials: energy, water, crops, and metals. And just as the demand for more energy-intensive goods goes up so do the unit costs of carbon emissions.
It’s a vicious circle in which supply is going to struggle to keep pace with demand, and the availability of resources becomes more expensive, at a minimum, and in some cases possibly depletes.
As a result, manufacturers across the board are facing unpredictable price hikes and volatility for their key raw materials. Even secondary costs are more volatile: packaging, energy, and transportation being obvious examples.
3) Limited Alternatives for Management
After years of eradicating excess from the supply chain, and creating just-in-time operations, there is little room for maneuver. If 40 to 60 percent of a manufacturer’s costs are accounted for by raw materials, sub-components, packaging, and energy, then an annual increase of these costs by 10 percent is going to be significant, especially if the company is already operating on very tight margins.
Manufacturers either have to eat into their competitiveness by raising prices, or cut into profits.
Summary
The commodity markets have evolved over the past ten years. It’s a one-way journey. We aren’t going back to a period of relative calm. Fortunately, commodity management systems have evolved to become an essential solution for any firm that buys raw materials in bulk.
Eka's InSight CM platform captures, analyzes, and manages demand, budgets, forecasts, coverage, procurement, and hedging while providing real-time scenario and intelligence capabilities to optimize decision making. The platform includes solutions for agriculture, metals, energy, and commodity procurement.
