4 min read

Finance and supply chain synergy protects margin from skyrocketing commodities prices

Bryan Baum

Director, Procurement Solutions

Commodities prices are causing panic in procurement and finance teams. Coupled with record-high shipping costs, finance and supply chain need to be more closely aligned than ever.

Global price volatility affects every sector imaginable. From commercial products to the consumers paying for goods and services, the price of commodities deeply impacts everyone’s bottom line. Today’s skyrocketing commodities prices are squeezing businesses worldwide.  

No one feels this squeeze this more acutely than supply chain and procurement professionals, who spend each day both ensuring smooth operations for their business while trying to maintain margin. Similarly, finance leaders find themselves caught in the same lurch, needing to take cues from procurement to better decide what actions to take to protect the financial health of the business. 

Commodity prices can send procurement costs into disarray 

Beyond the humanitarian crisis in Ukraine, the war in Eastern Europe is driving steep price increases in fertilizer, as both Ukraine and Russia are some of the world’s most important fertilizer and agricultural commodity providers in the world. Farmers needing to pay more for fertilizer will need to increase prices of their goods, making agricultural commodities more expensive. 

Similarly, fracking sand is at record-high prices. This contributes to global oil prices, already driven up by war in Ukraine, because U.S.-based oil production is simultaneously more expensive and lower in volume. With oil at a premium, the cost of shipping is increasing in tandem. 

Procurement professionals certainly don’t need to be told this, but the fact is that higher raw material prices make manufacturing more costly. Budgets can quickly veer off course, thanks to sudden fluctuation from expected costs, and margins can be difficult to maintain. Although it can feel difficult to overcome in the moment, procurement professionals can inoculate themselves to some degree by becoming more agile. 

Contingency plans are necessary. Visibility into all aspects of a business’s supply chain operations make it clearer and easier to understand where to make adjustments to stay closer to budget. A full and comprehensive view of material origin and sourcing partners opens up several levers to pull when faced with severe cost disruption. This could materialize by changing which raw materials will be used in manufacturing or simply by finding other sources of the material at lower costs, thanks to either regional price differences or the ability to negotiate with suppliers with existing relationships. This visibility can also reveal supplier volume, enabling procurement leaders to gauge which providers can handle more volume at potentially a lower cost than distributing the volume across each provider. 

Visibility enables contingencies, which, in turn, enable resilience and agility. 

Shipping prices compound commodity costs 

Raw material costs aren’t the only challenges facing businesses today. Shipping prices are being affected on several sides. Beyond oil price spikes, procurement leaders battle record-high shipping costs. In fact, Danish shipping company Maersk will see record profits as demand for their shipping services propels past expectations.  

The same visibility and agility is needed for the shipping leg of manufacturing. End-to-end views are a must for procurement managers to help stabilize both costs and performance. Can shipping methods be adjusted to offset disruptions like nationwide oil price hikes, or record-high shipping container pricing? Will delays in shipping speed affect the end consumer, and if so, can this be quickly and easily communicated to customer service?  

These questions can be answered with the ability to see end-to-end operations from sourcing to manufacturing to shipping. This is enabled by having a central management system, or procurement control tower, of all procurement and supply chain operations. 

Procurement isn’t alone: Finance needs visibility, too 

Commodity pricing and its effect on shipping costs aren’t only creating chaos for procurement. Finance leaders need to work in close tandem during turbulent times to ensure that supply chain performance is tracking with operational goals and expectations. Rapid, unexpected price increases can derail an organizational budget. 

Finance needs visibility into procurement and shipping costs to evaluate its impact on the overall business. From there, they can determine what steps to take to balance the cost-to-profit margin. Does it make sense to raise prices for the end consumer? Is it a better choice to allocate more budget to procurement for an allotted period of time to weather the storm? Or will it be necessary for other departments, like marketing and sales, to drive demand for more easily attainable or lower-cost goods? 

Sharing visibility cross-functionally allows collaboration and improves the performance of the entire business, thanks to more agility and resilience. Without it, questions will abound as to why pricing is so high, why budgets can’t be met, or why margin is skewed so detrimentally. Keeping open the lines of visibility and communication is absolutely critical today, as commodity prices wreak havoc globally, both for businesses and consumers at large. 

 

Conclusion 

Finance and procurement need to be in lockstep to ensure that margin stays balanced during times of cost hypergrowth. Anaplan enables “what-if” scenario planning and advanced modeling to better forecast the impact of cost disruption and help finance and supply chain work in tandem. By using Connected Planning, finance can see exactly where costs are rising from procurement to distribution, allowing supply chain to help finance in setting and keeping to a realistic operational budget. Together, these leaders can ensure more operational efficiency and cost-management, thanks to shared responsibility and accountability. 

Rethink the way your company approaches procurement planning and prediction.

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