PurchTips edition #372

Spring is officially here! As a human, I love Spring. As a procurement professional, I hate Spring.

While Spring brings some beautiful weather, it can bring some ugly price increases in certain commodities. For example, US gas prices usually increase $0.35-$0.75/gallon between February and May.  Also, Spring weather plays a part in determining crop choice and, therefore, supply and prices for various agricultural commodities later in the year.  You probably buy commodities that experience seasonal fluctuations.

For those seasonal commodities that you buy, you need to develop a contracting strategy. In developing your seasonal commodity contracting strategy, you have a few different options:

• Lock in a fixed price. Some executives love predictability. Especially for raw materials that go into finished products that must be sold at a fixed price over a period of time. With this strategy, you might end up paying more because suppliers have to pad their price to account for their risk. But it pays off when predictability is valued and/or if prices in the broader market rise more substantially than expected.
• Buy “hand-to-mouth.” This means not contracting with a supplier, but buying what you need, when you need it, at the market price at the time of purchase. While this assures that you’ll never pay more than the market price, it lacks the value that predictability and contractual assurance of supply offer. However, it can pay off financially in times of declining prices and ample supply of seasonal commodities.
• Agree to an index-based adjustable price. An index-based adjustable price shares risk between buyer and supplier, so suppliers are less likely to pad their prices. While this approach lacks predictability, it does enable you to contractually secure supply. Plus, it can pay off if market prices drop lower than predicted.

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