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Yesterday, Nestle’s senior procurement executive declared what many consumer products and other industry supply chain and business executives are fully aware, that prices for inbound raw materials and commodities have increased at unprecedented rates.  Of more concern, this situation could continue for some time to come.

In an article published in the Wall Street Journal (paid subscription of preview account required), Kevin Petrie, the head of procurement for Nestle noted that a combination of factors attributed to financial speculation, bad weather, and the rising price of oil are dramatically impacting the cost for cocoa, coffee and other ingredients.  He added: “We see tremendous volatility and headwinds.”  That statement is significant since as the WSJ points out, Nestle is one of the biggest raw food buyers in the world with an annual spend of over $71 billion.  Mr. Petrie noted one specific example where investment funds accounted for 38 percent of the New York Arabica coffee futures market, with no intentions of taking delivery.  Political crisis in areas such as the Ivory Coast and the Middle East and the vast extremes in weather events during recent years have also added to crop failures or setbacks.

The obvious question for procurement and supply chain strategic teams is how to prepare or try to overcome these significant headwinds.  One obvious conclusion is that strategy, size and buying leverage do matter. The WSJ observed that Nestle has established commodity research teams to forecast prices six-quarters into the future, peg longer-term trends, and is itself utilizing futures contracts and hedging to lessen exposure to price swings.  That strategy is not for everyone, since some companies have experienced setbacks in the past when short-term markets collapsed, and hedging provided negative results.

Another company that practices active strategic commodity planning is Apple, which has not been shy in placing multi-year, multi-billion dollar contracts for strategic long-term supply. Just this week, a posting on notes that in 2010, Apple became the world’s largest buyer of semiconductors, amounting to $17.5 billion of semiconductor spend.  That is leveraged buying power and comes with some significant influence. A Table listed in the article shows that among the top five global buyers, there is a 110 percent difference in buying power from number five Nokia, to number one, Apple. Another interesting observation is that the number two buyer Samsung also serves as Apple’s largest supplier.

The most significant takeaway from this commentary applies to companies who cannot garner such buying influence, or who cannot afford to invest in strategic commodity teams and hedging.  A couple of thoughts come to mind:

  • Be prepared to absorb some form of price increases, or find other means to offset these increases.
  • Explore buying co-operatives where multi-company needs can be pooled
  • Now, more than ever, it is very important to have supply agreements spread across multiple suppliers. Supplier loyalty and continuity is a rather important strategy right now and this is not the time to be consolidating the vendor base that provides strategic raw materials.

Finally, strategic commodity planning requires the best available product demand plans and forecasts.  It is rather important that senior procurement managers be active participants in the executive level S&OP process.

What other recommendations can you share regarding the current challenges in high commodity prices?

Bob Ferrari