11.04.11 – Sourcing consultancy INVERTO develops a dedicated forecasting tool to determine exactly the right time to buy on raw materials markets
Timing is everything when it comes to sourcing raw materials.
Picking the wrong time to buy can cost you dearly when sourcing raw materials. With highly volatile markets, the price companies have to pay for raw materials can vary from one day to the next. And this can seriously impact a company’s results, especially in material-intensive industries, such as manufacturing, construction and packaging. Buyers therefore have to assess and determine the best time to buy within a very short space of time. This can only be achieved by realistically assessing the expected price trend. Buyers often rely on past experience or individual forecasting instruments when making decisions. Mathematical forecast methods and technical analyses are another important guide. But which of these approaches is reliable? Sourcing consultancy INVERTO has tested the accuracy of such models using real industry data and developed a set of indicators and tools to determine the ideal time to buy raw materials. Raw materials buyers thus benefit from greater planning reliability – even in extremely volatile markets.
Raw materials sourcing is growing in importance for businesses. Purchasing is becoming more and more of a challenge due to the increasing scarcity of resources and market fluctuations, which are now being significantly influenced by market speculation. This is true not only of energy and industrial raw materials, such as steel, but also of agricultural raw materials, such as cotton and wheat. Does the current price level lend itself to securing raw materials in the short or long term? At what price should you definitely buy? What developments on the raw materials market influence calculations?
Purchasing decisions for raw materials are complex and have far-reaching consequences for both a company’s financial results and security of supply. The recent global knock-on effects of natural disasters and geopolitical revolutions have once again highlighted the importance of making raw materials sourcing more professional and enhancing the ability of companies to forecast. Yet buyers and financial experts at companies often base purchasing decisions only on past experience and subjective assessments. However, using a complete set of indicators significantly improves the accuracy of price movement forecasts for raw materials, thus enhancing planning reliability for raw materials sourcing – even in extremely volatile markets. In addition to technical analysis techniques, a complete set of indicators includes forecasting models and fundamental data. Each set is customised for the relevant company. These technical analysis methods help improve the timing of raw materials sourcing by identifying possible trend reversals. Forecasting models provide an objective assessment of short to medium-term price trends. Knowledge of fundamental economic data enables a quick response to economic developments, global crises and demand shocks.
Forecasting models – identifying price trends – fast!
The price level can only be deemed “high” or “favourable” based on a considered assessment of anticipated developments. Historical data serves only as an initial guide. Sourcing consultancy INVERTO subjected the most common time series analysis methods to an in-depth analysis and tested them using real industry data. In doing so, it assessed the best times to buy non-ferrous metals and steel. Autoregressive methods, such as the 2003 Nobel Prize-winning GARCH method, SETAR and ARIMA, produce the best results when it comes to identifying price trends.
Technical analysis – identifying purchasing signals and signs of overheating raw materials markets
Before every purchasing decision for raw materials, buyers analyse the price trends of recent weeks, months and even years. Chart analyses make this examination more objective. INVERTO’s raw materials experts have compiled technical analysis instruments to assess the right time to buy. These can be used by buyers to recognise price trend reversals and identify purchasing signals. The weighting of the dozen or so instruments used in this process helps to determine exactly the perfect time to buy.
Practical solutions – recognising and securing sourcing benefits
“It is important to combine the methods sensibly and to compile the relevant indicators with a minimum of outlay”, emphasises Lars-Peter Häfele, an INVERTO expert in non-ferrous metals. “The recipe for success is ‘technical analysis + forecasts + fundamental data + experience = purchasing decision'”, he adds. The sourcing specialists at INVERTO work with a company’s buyers to compile the key indicators for procuring the relevant raw materials. Using the individual indicator sets, the comprehensive assessment of a given point in time then only takes around 60 minutes and is based on objective data. One company in the metal-working industry has already assessed and secured tens of thousands of tons of non-ferrous metals using this very method.
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