Ongoing forecasting key to overcoming price volatility

12 August 2010

12 August 2010 | Lindsay Clark

Procurement teams need to work more closely with marketing to help construction and chemicals firms cope with increasing volatility in the cost of raw materials.

In a survey by consultants Simon-Kucher & Partners, 70 per cent of the 250 European business managers quizzed said annual contracts with their customers could not keep pace with volatility in raw material prices.

Report author and director at the firm Desmond Sullivan said purchasing teams would need to move away from producing one yearly forecast of input prices for their internal marketing teams who set output prices. Instead they would need to develop scenario planning to help marketing set future prices as costs become more volatile. This means they would need to present ongoing forecasts and help work on scenarios to cope with prices going up and down.

Procurement and marketing teams are now sharing more data and working more closely to ensure companies’ prices can cope with changing input costs, Sullivan said. “They have recognised annual processes do not work so much. Procurement teams provided the outlook for the costs, but they have moved away from that, realising they cannot forecast. Instead they are asked to develop a number of scenarios.”

This would enable marketing teams to put together a strategy for each scenario, he said. Those that were not able plan in this way, were finding that the “horse had bolted”.

In report he said: “Volatile raw materials costs and ineffective price management pose an acute risk to a company’s performance and long term success.”

German chemical firms expect a loss of €500 million (£411 million) in 2010 as a result of higher raw materials costs, the report said.

Earlier in the year, SM reported that steel firms were coming under pressure as the cancellation of annual contracts with iron ore suppliers was causing price increases and greater volatility in costs. This was also causing problems for construction firms because they found the cost of steel products more difficult to predict.

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