Pricing volatility can provide opportunities for procurement officers able to spot and lock in low prices on raw materials that may head higher in the long run.

Interview Transcript

What is price volatility and how does it affect global businesses?

Pricing volatility is just looking at the price fluctuations around the baseline forecasts. Typically one of the challenges supply chain managers face as well as procurement managers face is that even though the baseline macroeconomic outlook has not changed significantly, when they look at their own individual markets they will see very sharp price fluctuations. A particular case that I can sight is basically copper prices. Within copper prices one of the main end consumers is the Chinese economy. Over the past two to three years our IHS economic outlook has basically shown that Chinese GDP is going to grow between seven and seven and a half percent, and some of these headwinds or tailwinds may cause it to accelerate or decelerate based on that. However, the fluctuations in copper prices have been much more dramatic over that same time period. You have seen copper prices move as high as $10,000 a metric ton and they basically move down to as low as $7,000 a metric ton as of about a month ago. So here when I think about pricing volatility, you basically have supply managers trying to better understand what could be driving some of these wilder fluctuations within their own individual commodity sectors or key spend categories.

What top and bottom line challenges or opportunities does volatility present?

In terms of the bottom line I think pricing volatility presents quite a lot of opportunities for procurement executives. In the case of raw upstream commodity such as copper, or oil, or aluminum, basically you are able to secure raw material at lower prices based on understanding the pricing volatility within an environment. So even if you might have a baseline outlook where you think this is the place that prices are going to settle for the particular quarter or the particular year, you may see prices deviate on a weekly or a daily basis from this baseline outlook. And here if a pricing executive is better able to understand where prices are going to be headed or potential upper or lower cases you're able to, in a sense secure greater cost savings on some of the raw materials that you are trying to acquire. In terms of a top line opportunity, I think for strategic corporate planners, who are basically trying to understand whether it's a wise or prudent decision to make an investment in a large capital expenditure project, understanding pricing volatility gives you a better chance to in a sense mitigate the risks associated with both securing supplies for a project construction that may occur on a three to five year basis. But also, once the project begins you're able to look, basically monitor costs on an ongoing basis, whether it be monthly or quarterly, and from there also try to mitigate some of the operating risks associated with just the construction endeavor itself.

What techniques are procurement leaders using to address risk?

Currently, procurement executives are using risk scorecards to address the near-term risks that they face. These risk scorecards are primarily qualitative in nature, so they're basically using these to not only capture the near-term risks, but also express how they see markets unfolding in the next, say, 12 to 24 months. I think going forward the tools that need to be developed are going to be focused more on numbers and then visualization. And in terms of how that's going to happen, it's that you need to develop better tools to, in a sense, take the words that are currently being expressed only on risk scorecards, and then to transfer them into quantitative numbers, which then in turn can be translated and transformed into visualizations that can better express and communicate to a broader audience.

K.C. Chang, is senior economist, non-ferrous metals, IHS Pricing & Purchasing