Raw materials study:
Rising raw material prices significantly impact on business performance
Rising raw material prices
Our recent study on raw materials confirms what many buyers are concerned about: business performance is being put under significant pressure by rising raw material prices and reduced availability. The current developments in world politics are among the main causes. Measures for ensuring secure supply are therefore becoming increasingly common, such as developing alternative procurement markets.
Raw material pricing trends: respondents expect a rise in raw material prices
In July and August 2017, we surveyed 91 managing directors, board members and procurement managers from German, Austrian and Swiss companies, and asked which external factors currently have the greatest influence over their business performance. Raw material pricing trends took top position with more mentions than ever before. Approximately three quarters of all respondents anticipate price increases that range from moderate to severe. Reduced availability of raw materials also plays a decisive role. The majority of survey participants consider raw material procurement to be under threat because of increasing trade restrictions. Companies requiring industrial raw materials such as metal, plastics and chemicals, in particular, face major challenges. The uncertainty of raw material pricing trends means that 65 percent of companies surveyed now negotiate fixed price agreements with their suppliers. However, the duration of these price agreements is becoming progressively shorter.
Alternative procurement markets on the rise
The participants see increasing trade restrictions as a major risk. 56 percent of respondents anticipate shortages, and resulting price rises. Only one third source their raw materials within the EU and therefore see no threat to their raw materials procurement. Over half the participants expect China, which supplies raw materials to almost 80 percent of respondents, to face restrictions. To counter these risks, participants are attempting to secure alternative procurement markets through relocation or partial relocation. Companies are also responding by changing suppliers and testing alternative raw materials.
Managing supply and price reliability
‘It is common for companies to have only two or three suppliers and to know very little about the rest of the market. By systematically investigating the market and actively managing risk, companies can gain themselves time to react in an emergency, and consequently become more flexible and ensure supply in situations that may be critical,’ maintains INVERTO Managing Director Markus Bergauer. Together with his team he assists businesses in setting up professional risk and raw material management. As well as using a wide network of suppliers, Bergauer suggests regular risk monitoring to avoid supply shortfalls.
The most commonly used measures in raw material management remain supply chain analysis and inventory optimization. In second place is supplier base optimization, followed by long-term price agreements. Companies would prefer to reduce their raw material requirements, in particular by using new materials and recycling.
Raw material pricing is likely to continue its negative trend.
It is therefore essential for industrial businesses to actively manage their risk and increase their flexibility by spreading raw materials procurement over several countries. The task now is to build up the relevant expertise, sooner rather than later.