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Commodity Management

A ComTech Advisory Whitepaper

Introduction
Rapid global population growth combined with increasing urbanization is driving demand for raw materials of all kinds. By
2030, it is estimated that there will be 1.4 billion middle class consumers in China compared to 365 million in the US and 414
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million in Europe , placing increasing strains on the supply and distribution of raw materials and finished products. For the
last five or more years, commodity and raw material prices have been extremely volatile, in part due to supply/demand
tightness, and this paradigm is one that is set to continue in to the future. For consumer product companies, these facts
represent a significant challenge and risk to their businesses.
Consumer product companies, faced with volatile raw material and
energy costs on one side, and price conscious customers willing to shop
around on the other, have sought ways to minimize these risks. They
have stripped costs and inefficiencies from their supply chains and
businesses and, in some instances, radically overhauled the way in which
they manage the procurement and planning functions in favor of a
commodity management approach. Commodity management means
approaching price exposure more like a trader tracking price movements,
utilizing hedging and other risk mitigation tools and measuring
performance against market as opposed to budget or forecast. Some
companies have deployed commodity management software, fully
integrated with their ERP and other systems, to manage supply chain
price exposure.

By 2030, it is estimated that
there will be 1.4 billion middle
class consumers in China
compared to 365 million in the
US and 414 million in Europe,
placing increasing strains on the
supply and distribution of raw
materials and finished products.

In an uncertain but volatile future, more consumer product companies will need to adopt commodity management to ensure
their profitability and even survival. In order to be truly competitive however, they will need to utilize more agile commodity
management solutions that provide predictive analytics and decision support. This paper examines commodity management
as a concept and looks at the emergence of next generation, commodity management v2.0 solutions.

The Growing Need for Commodity Management
Over the last decade, as the Earth’s population surpassed 7 billion people and Asian economies like those of China and India,
grew at average rates greater than 10% per annum, demand for raw materials of all types has grown considerably. The
supply/demand tightness created by this increased demand and/or, bottlenecks in production and distribution, has created
an environment in which raw material prices are extremely volatile and mostly rising over time. Even though prices have
been falling during much of 2013, volatilities remain high. Nor is this a temporary phenomenon as there is now 7-8 years of
history of price volatility and with further population growth and increasing urbanization in many developing regions of the
world, supply and demand tightness will undoubtedly continue.
Highly volatile commodity and raw material prices have a huge impact across a wide range of consumer product
manufacturers ranging from bakers to highly sophisticated computer manufacturers; in terms of raw material, packaging and
energy prices. Many of these companies also find that retail markets for their finished products are very competitive and
price conscious. Consumers are simply unwilling to pay continuously increasing retail prices. Effectively, consumer product
companies are squeezed between highly volatile and mostly more expensive raw material and energy costs on the one hand
and more cost conscious consumers on the other.
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In a recent survey , when asked what key factors currently affected business results, 91% of the participating companies, all
consumer product companies of various types, stated ‘Raw material prices’. The same survey showed that the most popular
tools used to protect against the negative results of raw material price volatility were long-term price agreements with
suppliers, passing on costs to customers, optimizing inventories and product substitution. Most suppliers are smaller and less
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UN Population Division/Goldman Sachs
Raw material cost management- business critical supply risk and price volatility, INVERTO raw materials survey 2011

© Commodity Technology Advisory LLC, 2014

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