Summer 2012 might be a good time to look at any commodity input that you have. According to the World Bank's projections on the Asian markets China's growth rate has declined since 2010 and is expected to lower then level out in 2012. Some analysts think that the price for crude, copper, and iron ore, commodities that China consumes in large quantities will have downward pressure in 2012. I believe that these analysts are most likely on target.
When considering metal commodities, we must realize that China has experienced sustained growth over the last decade, and with that growth comes demand for commodities. Mining operations take a long time to put in place due to political lines, capital expense, and infrastructure; so with the strong growth in China over the past years capacity in the metals markets is higher now than it was in 15 years ago. While there are other emerging markets that will increase the demand for metals and minerals supply and demand in metals will be rationalized and metals will most likely go down in price. Also keep in mind that U.S. consumption is still very low, many experts believe that it will take a few more years for real estate and construction to fully heal, and at the same time construction is slowing in China as well, so the decreased global demand for copper, iron, zinc etc. will put downward pressure on the commodities prices.
The price of Oil, the mother of all commodities, is expected to decrease the summer of 2012 while this means that many inputs that we depend on such as plastics will eventually go down in price it does not necessarily mean that the price of Gasoline and Diesel will go down in price. This year the U.S. has exported around 655K barrels of refined fuels, and this is the first year in a long time that the U.S. has exported more refined oil than it has imported. So while domestic demand for gasoline and diesel has decreased substantially, the price at the pump does not reflect the lowered demand. The reason for this is that refined oil is a global market, and even though the world U.S consumption of fuel has decreased, there is still plenty of demand in the world markets. I also believe that the oil companies and refineries feel that a new higher equilibrium price for gasoline and diesel has been established, so I personally think that the $3-$4 per gallon at the pump is here to stay for a while.
So, what does this mean for Supply Chain Managers? Well part of supply chain management is setting optimal inventory, purchasing, ordering and logistics policies that create the most value for a company’s Value Stream. If we have reason to believe that there is going to be a dramatic change in input prices from our suppliers and service providers, then we will need to change our purchasing strategies, and this will lead to changes in our optimal inventories, ordering and logistics strategies as well. Any time one component changes of the Supply Chain changes all other value points will also need to be re-optimized. When major input prices are low then the tendency is to stock up on that item, but there are downsides to reacting to price changes without considering all of the components of your supply chain, and a knee-jerk reaction without computational validation is a sure way to destroy value for your company.
As a supply chain managers we are the links between all of the functional area in our companies i.e. Marketing, Purchasing, Finance, Production etc. so when input prices change in a major way our Buyers are going to behave differently because their main focus is getting the best price. It is the job of the supply chain manager to tie these functions together and provide them with the tools to make the optimal decision whatever the market conditions may be. To give a good example that we all have encountered and understand very well: Marketing decides to run an AD campaign for a product, but that information is not passed along to Production or Purchasing and the Supply Chain Manager was not included in the Marketing decision. Once demand increases many functions in the value chains must then react to the increased demand. Production starts adding shifts and diverting production from other items to the high volume item. Purchasing also reacts by increasing their orders for inputs; this may force the purchaser to go to a secondary supplier that most likely charges higher prices. Customer service will be hit with higher call volume. Sales begins to here from their major customers about lack of PO fulfillment. The logistics department then must react by buying more capacity from the carriers, and typically at a higher cost. Finance needs to cash flow all of this activity, so they must tap the credit facility this may trigger a higher cost of capital through debt financing. The Marketing campaign eventually ends demand then returns to normal, but now you have a surplus of that product and all of the inputs for that product were much more expensive than normal. Now if the product is like most it will soon become obsolete which means that you will have to discount the remaining inventory at some point, so now you selling a very high cost item at a very low price. This is why Supply Chain is becoming major differentiator between the companies that get it and the ones that don’t. The Supply Chain function when treated as strategic part of any business will allow a company to dominate in their space regardless of market conditions on the supply side or market conditions on the demand side. Supply Chain is not just trucking, it is the management of optimizing all of the links in a companies value chain so as to maximize value creation among all of the functional areas in a company. Simply put Supply Chain Management is the difference between Wal-Mart and KMart(no offense KMart).
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