Why It Matters
With 65% of companies bracing for higher raw material costs, procurement teams are on the front lines of navigating price volatility. Yet many lack the tools and strategies to turn this challenge into opportunity.
As commodity prices climb, managing raw material costs has become a make-or-break factor for procurement leaders. A recent report by INVERTO, part of Boston Consulting Group, paints a stark picture: 65% of companies expect raw material costs to rise in the coming months, up from 48% last year. Only 13% foresee price drops, a sharp decline from 41% the year before.
This volatility is already squeezing profit margins. Nearly 40% of businesses say raw material costs are eating into their bottom line. Yet despite the clear impact, procurement teams often lack the focus and resources to manage raw materials effectively.
The Forces Driving Price Volatility
So, what’s causing this surge in commodity costs?
Geopolitical turbulence remains a dominant factor. According to the report, 40% of businesses cite geopolitical crises, such as the ongoing Red Sea conflict, as a reason to shift suppliers. The disruption of key shipping routes affects access to materials like graphite, gallium, and germanium – vital for electronics and manufacturing.
An uncertain economic climate compounds the issue. Demand fluctuations in different regions further tighten supply chains, while new tariffs and regulatory barriers drive up the cost of imports.
“The ripple effects of global conflict and economic uncertainty mean procurement teams are constantly recalibrating sourcing strategies,” notes Lina Tilley, Principal at INVERTO.
How Companies Are Responding
Faced with these disruptions, businesses are pivoting towards more resilient sourcing models. INVERTO’s report highlights three key strategies:
- Dual and Multiple Sourcing: 51% of companies are diversifying their supplier base to reduce dependency on any single source. This approach not only ensures stability but also enhances bargaining power.
- Nearshoring: By bringing suppliers closer to home, 39% of companies are cutting transport costs and reducing exposure to distant markets.
- Friendshoring: 26% are aligning their supply chains with politically stable and friendly nations to mitigate geopolitical risks.
Case Study: A leading European automotive company, grappling with rising aluminum costs, shifted to nearshoring and secured long-term contracts with regional suppliers. This not only stabilized prices but also reduced lead times by 20%.
Strengthening Procurement Teams for the Future
Despite the growing importance of procurement, Tilley warns that many teams are under-equipped to tackle these challenges head-on.
“Raw material price volatility is a golden opportunity for procurement teams to shine. Yet, many are held back by outdated tools and limited influence,” she explains.
A significant gap exists because procurement teams often purchase components rather than raw materials directly, limiting visibility into cost fluctuations embedded within those components.
To bridge this gap, INVERTO recommends a two-pronged approach:
- Upskilling and Training: Empowering procurement teams with data literacy and supply chain analytics ensures they can identify risks early.
- Digital Solutions: Tools like generative AI (Gen AI) automate market monitoring and detect price shifts before they impact the bottom line.
“AI isn’t just a buzzword. Companies leveraging Gen AI for commodity tracking have reported savings of up to 15% on raw material costs,” Tilley highlights.
From Tactical to Strategic Procurement
Tilley emphasizes the need to integrate procurement teams into the early stages of product development. By considering raw material costs during design, companies can lock in price stability and supply security from the outset.
Example: A global electronics manufacturer recently embedded procurement into R&D teams. As a result, they redesigned products to reduce reliance on volatile rare-earth metals, cutting costs by 12%.
“Procurement must evolve from cost-cutting to value creation. The earlier they engage in product cycles, the greater their strategic impact,” Tilley adds.
The Road Ahead
The rising tide of commodity costs shows no sign of receding. However, businesses that invest in stronger procurement capabilities can turn volatility into a competitive advantage. By diversifying suppliers, embracing nearshoring, and leveraging AI, companies can safeguard profits and build resilient supply chains.
“Smart procurement isn’t just about cutting costs – it’s about securing growth in an unpredictable world,” concludes Tilley.
Sources: INVERTO, Boston Consulting Group, Industry Case Studies
