Commodity Price Risk Management

The new front line for margin management

If asked to identify the main driver of their company’s profitability, most executives would probably point to the competitiveness of their products, the strength of their strategy, or their ability to cut fixed costs. But they would be overlooking an important inflection point.

With recent price shifts in commodities ranging from corn to copper and their ongoing volatility, the front line for companies to improve their earnings is radically changing,making it impossible for companies to stick to their old playbook and remain competitive.Managing the impact of raw material costs across a company’s value chain has become a key driver of financial performance. To successfully manage the rising impact of raw material costs on margins, procurement teams must play a bigger role in managing companies’ margins, with involvement across the broader organization as a whole.

The fundamental reason for this change is that raw material costs have climbed to become many packaged consumer goods companies’ biggest expense, accounting for about half of their costs. Yet their ability to pass through price increases in a timely manner to customers is low, particularly in highly competitive mature Western markets. As a result, packaged consumer goods companies, airlines, packaging companies, construction companies, automakers, and utilities have all become more vulnerable to rising material costs in the past few years.

Commodity Price Risk Management