Procurement teams and their organizations learned a lot during the COVID-19 pandemic. But one of the most critical lessons that procurement experts have taken away from the past two years is just how important it is to have a mature commodity risk management strategy in place.
Organizations that reach a high level of commodity risk management maturity aren’t just aware of the existing and emerging factors influencing the cost and availability of goods they depend on — they’re able to turn those fluctuations into value-driving opportunities.
Take a company like Nomad Foods. When the pandemic struck, it knew there would be huge disruptions across its key categories. But it also knew that they would have a major impact on demand from the newly closed hospitality industry, and likely cause significant short-term oversupply of some perishable goods.
Equipped with deep, reliable category intelligence and insights, the company was able to act on that opportunity while its competitors were fighting to ensure continued supply of essential goods. That allowed it to turn a supply crisis into an opportunity to create value while maintaining business continuity.
Every procurement team would love to be in that position, with a continuous flow of insights keeping teams ahead of market and category shifts and able to adapt strategies at a moment’s notice. But reaching that level of commodity risk management maturity is far easier said than done.
In practice, we find that companies are generally spread across a commodity risk intelligence maturity curve, from those in the nascent stages of developing commodity insights to those that are using real-time data to fuel predictive analytics.
Following are three key stages that organizations go through on their journey to commodity risk management maturity.
The early stages of commodity risk management. Organizations at the very beginning of their commodity risk management journey haven’t yet put many formalized plans or solutions into place. Overwhelmingly, they’re focused purely on cost containment and control, working to ensure that they can continuously source what they need at the right price.
That’s also reflected in how commodity and category managers work within those teams. They tend to operate in silos, focusing their efforts on negotiation and cost-saving, with little thought given to the wider corporate strategy.
From a data perspective, companies typically rely on historical insights relating to previous commodity price trends, supply and demand, and upstream cost drivers. That limits their ability to make proactive decisions to optimize strategies and avoid risk, and often leaves them at the mercy of suppliers that know far more about what’s going on across their categories.
If that description sounds like your organization today, following are some valuable actions you can begin taking immediately to advance your journey.
Mid-maturity commodity risk management. As companies start using data more tactically and shift their focus from simple cost reduction to more long-term cost-control measures, they move into what we call the “mid-maturity” commodity risk-management stage.
Organizations at this stage typically have clear guidelines and principles in place to enable procurement teams to act more strategically and play a defined role in risk management.
While those at stage one rely on gut instinct and historical data to make decisions, stage two companies have an appetite for analytics and intelligence enabled by current and reliable data. They’re able to use that data to make fast, informed decisions about what to buy, when to buy it, and whom to buy it from.
However, these data-driven processes often lack clear structure, frequently leading to situations where data is simply dropped into the laps of decision makers and they’re expected to translate it into actions quickly.
If it sounds like your organisation, here’s what to do to push on to the next stage:
Mature commodity risk management. Organizations at the final stage of maturity use internal and external data to build up a reliable, predictive, real-time view of the commodity markets on which they depend. With that view, commodity risk management can become a core responsibility of the procurement team, and everyone can clearly see how their decisions and actions can impact overall risk exposure.
However, the biggest difference between these companies and those further down the maturity curve can be seen in their culture. In an organization that’s reached commodity risk management maturity, key stakeholders take an active interest in the strategic value of procurement, and welcome the department’s insights during strategic conversations.
The reliable delivery of predictive insights enables procurement teams to steer the organization through even the most significant supply and market crisis events. That in turn helps the department to gain the attention and respect of strategic decision-makers, giving the department its rightful seat at the table.
Even within companies that have reached this final maturity stage, there’s still room for improvement in how they manage risk and operate day to day. If you think your team is at this stage, consider taking these actions to optimize your risk strategy and operations:
Omer Abdullah is co-founder and managing director of The Smart Cube.
Timely, incisive articles delivered directly to your inbox.