Buyers open new doors to beat price hikes
Purchasing professionals aren't sitting on their hands in the wake of volatile raw materials costs. Buyer polls show changes in buying patterns, sources and strategic thinking.
By Tom Stundza -- Purchasing, 6/15/2006 2:00:00 AM
Buyers appear to have misjudged the cost inflation of raw materials this year—and the unpredictable and unexpected costs are throwing many corporate purchasing budgets into a tizzy. Already, buyers are working to expand their supply base for raw materials, according to new surveys, as many are moving from spot purchasing to quarterly contracts with guaranteed three-month pricing whenever possible.
After seeing double-digit price hikes each of the previous three years, purchasing professionals bet on moderate 9% inflation this year on the pricing of a market basket of energy, metals, chemicals, resins, rubber products, lumber, building and packaging materials and electrical and electronic components. Purchasingdata.com suggested that 21% inflation in 2005 for a market basket of 108 commodities would be followed by 5% inflation in 2006. Today, all these forecasts appear to be inadequate; for example, transaction prices for the raw materials tracked by Purchasingdata.com already had increased by more than 10% by the end of April—and have continued to climb since.
Heavy speculative buying of traded commodities, tightened supplies of other raw materials, short supplies of some commodities and components, fears of downstream consumer-product inflation and geopolitical tensions have boosted industrial raw materials pricing to levels never before seen for crude oil, nonferrous metals, precious metals, natural rubber and some grades of lumber. And this all is happening just as worldwide industrial activity has awakened from a lengthy slumber, boosting demand for manufacturing materials.
Upshot: A growing number of buyers at domestic industrial operations (56%) say they have joined with manufacturing personnel more frequently—sometimes as often as weekly—to reevaluate sourcing needs and to find such solutions as new suppliers or alternative commodities to materials inflation and delivery bottlenecks.
Also, a number of buyers (38%) have joined with corporate financial staffers to work on cost-reduction efforts through such activities as hedging or low-cost country sourcing. "I have to maximize my buying dollars when sourcing semiconductors and other components," says the supply chain manager of an electronics manufacturing services firm. That may explain why 76% of the buyers polled have approached traders or offshore producers about buying production-grade materials.
Scrambling for answers
Interestingly, a separate study of purchasing organizations this spring by the Aberdeen Group of Boston finds that "market pressures are causing 68% of the companies polled to reduce costs while maintaining quality" at a time when 36% are battling rising commodity prices and 30% are facing tightening raw materials supply. The study also shows that 71% of the buyers of electronics components polled are sourcing offshore now—as opposed to 45% five years ago.
"Specialty chemicals' prices have gone even higher than anybody had forecast," says a procurement advisor in Texas answering an online survey at Purchasing.com. Some buyers of petrochemicals say that while inflation appears to be capped at about 3% annualized growth, that's a strong enough increase to create some of the highest transaction prices for commodity chemicals and polymers recorded in the past 26 years by Purchasingdata.com.
"The prices of corrugated containers are skyrocketing," comments an Indiana-based buyer/planner. "Kraft paper multiwall bags have joined corrugated cartons and plastic film among the high-priced packaging commodities," complains a senior purchasing agent in Massachusetts. A commodity manager in Michigan is upset with "recent sustained price increases for aluminum extrusions and zinc die castings." Dry cell manufacturers say the weekly rise in global zinc prices is forcing them to hike the prices of their products.
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