These last few weeks, there has been ample media coverage of rising prices for a variety of commodities, from gold to food and many more. Yesterday’s article, “Rising costs threaten corporate profits,” on Comcast.net is just one example.
That article noted that “[c]oncern about the effect of rising [commodity] costs on profit margins” has impacted stock prices of publicly-held companies. Now, you probably are aware that the compensation and net worth of senior management of publicly-held companies is tied to stock price, so these people are going to care about prices paid for commodities – something that you, as a procurement professional, can affect.
Quite simply, if you can control what your organization pays for commodities better than expectations, your organization’s stock price will likely rise. That means your management’s compensation and net worth will likely rise. And you will deserve some credit for a job well done.
But that’s assuming that you do a good job. What does a good job of commodity management entail? Well, I’m going to simplify it a bit, but here are a few components:
Know the market well enough to predict its future direction. You should have enough experience with what you buy that you know that price increases are on the way long before the media starts reporting them. What drives the cost of what you buy? What early indicators will you be looking for that usually precede cost increases? Know the cycle if there is one. Watch for trends. Try to understand how changes in circumstances – the economy, supply, demand, weather, etc. – will impact the commodities that you’re responsible for.
Communicate your forecast. Executives don’t want to be blindsided by things that threaten profitability, much less constrain their compensation or net worth. If you see prices rising, don’t hide and hope for the best. Share with management what you see coming so that your organization can make necessary adjustments such as planning to pass on the cost increases to its customers, finding other areas for cost savings, looking at substitute materials, and/or maybe even giving the procurement team more training. This will also enable management of publicly-held companies to give guidance to investors who may like unpleasant surprises even less.
Use every tool at your disposal to control costs. From hedging to sourcing and everything in-between, you need to pull out all the stops to keep a lid on costs. You know the challenges that you will face, so do something about it. Your performance will be watched.
Communicate your success. I believe that if you know your market and use the cost containment tools available, you have a good chance of mitigating the worst of cost increases. Don’t be shy about showing how you outperformed the forecast or expectations. And don’t be surprised if your management does the same on its next earnings call and the stock price rises accordingly.
While the cost-cutting attitude brought about by the recent recession gave procurement departments the opportunity to help their organizations survive, I believe that today’s environment of escalating commodity prices presents another golden opportunity for procurement departments to shine.