Mitigating a supplier's input costs_2

Q: Our aluminium manufacturing company in the Middle East buys a lot of white wood for packaging. We are unable to benefit from bulk purchasing because the wood's price constantly fluctuates and suppliers won't fix the price unless we buy a whole year's s

A: Dominic Limbrey, manager, direct material services, at Xchanging Procurement Services, writes: You need to prioritise what is most important to you. This is likely to be a mix of lowest price, price stability and availability. Whichever is most important will drive your procurement behaviour. However, what you can do is fundamentally driven by what the supply market you are buying from can provide, as well as what you are prepared to do yourselves in terms of, say, warehousing.

A good starting base to inform your decision-making process will be to understand what is creating the price volatility in your commodity. For instance, if the commodity is heavily affected by the US dollar and you are buying in a non-dollar currency, you could propose to your supplier that you transact in US dollars. This might improve your price fluctuation problem and allow you to leverage a volume purchase deal that doesn't dictate you take it all at once. You can then back off your currency exposure by hedging your US dollar requirement.

If you find there are other factors that are driving price volatility, you need to find out how you can mitigate these exposures by working with the supplier. One way to do this might be to limit the supplier's exposure by putting a "cap and collar" on the price of the product. Agree a basis for price movement founded on agreed indexes in the product's cost, so when they move outside of an agreed tolerance, the price changes.

If this doesn't create the opportunities you need, consider the costs you might incur by using cheap third-party warehousing to store the white wood.

Another alternative is to look for a distribution solution where you negotiate the deal with the distributor with knowledge of what its costs are. You might find one that has economies of scale around the costs and processes to handle the materials better than you can. This solution hinges on the price differential you can achieve from bulk purchasing, as introducing an intermediary will attract more cost but also more profit for another party.

If your budget for white wood is insignificant and your supplier sees you as an irritant, consider using another to which you will mean more. Or you need to find a way to be more attractive to your incumbent, such as by improving your mutual relationship.

You may also have other options to use reusable packaging such as steel stillages, or MDF, which, if you were shipping to export, would allow you to negate the cost of fumigating your containers before shipping.

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