The commodities market has faced, and continues to face, several challenges caused by the Covid-19 pandemic. While demand initially fell due to the shutdowns that occurred in several parts of the world, with the reopening of the economy, demand for many of these commodities grew much faster than producers could keep up.
The result was a shortage of some raw materials and, consequently, the price increase. To turn this game around, companies must look for ways to make their commodity management simpler and more optimized, including reviewing contracts and understanding industry trends.
Best practices for commodity contracts
Commodities have a fluctuating value and price, that is, they are volatile goods with a high degree of liquidity. Exactly for this reason, companies need to invest in practices that contribute to reduce the risk and the costs of acquiring these goods.
Metrics
Count on well defined metrics and using straightforward language prevents contractual misunderstandings from arising and harming business. Therefore, it is essential to avoid vague quotes related to prices and metrics and to ensure that SLA metrics are aligned with the company's needs.
Likewise, price indexes need to be detailed explicitly and include provisions in case the index used is changed for some reason.
Quality
With the objectives and goals set and with a clear vision of the risks that the company is willing to take, the expectations between the company and the supplier can be detailed, always taking into account the quality of the commodities, rather than the quantity.
Relationship with suppliers
Although the focus of the Purchasing sector is to carry out negotiations that benefit the company, one must not forget the importance of maintaining a good relationship with suppliers. This means understanding possible problems that the supplier may have and what the causes are – whether it was an extraordinary event or even a mistake by the buyer – so that the supplier is not unfairly penalized. These possible events must be described in the contract.
Strategic sourcing
By building good relationships with suppliers, the Procurement department can negotiate fixed prices for certain essential items and ensure their supply in case of emergency. This also involves analyzing factors related to quality, price, delivery times and selecting strategic secondary suppliers.
Long-term strategy
Thinking about a long-term strategy in the commodities market can avoid surprises in the future. And this can be applied to contract management, with the company purchasing materials in advance.
This helps prevent sudden price changes from harming business and works as a strategy for reducing indirect costs in the long term.
Market research
Before purchasing commodities, it is essential to benchmark prices in the market, analyzing suppliers and products and monitoring the supply chain to avoid risks and anticipate demand for seasonal goods.
Lowest Price Guarantee
Including a clause in the contract that obligates the seller to meet a lower price if found allows the buyer to negotiate the contract in the event that situation arises and gives the seller the opportunity to keep the deal and price their material to meet the request.
Consistency of supply
It is also important to include a statement that the requirements regarding the quality and quantity of the purchased commodities cannot be changed drastically. In the long run, this ensures a more stable supply of the commodity and without unexpected price jumps. On the seller's side, it is a guarantee that the buyer will not modify these requirements without prior notice.
Risk in the commodities market implies uncertainty in business processes, making management more complex, especially in the long term. Therefore, a commodity management strategy is essential for the health of the company.
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