Fixed price contracts best way to manage food price risk

Will Green is news editor of Supply Management
28 September 2014

Long term fixed or capped price contracts are the best way of dealing with cost risk for non-traded commodities in the food sector, according to a survey.

A report by 4C Associates said 81 per cent of respondents thought such contracts were the most appropriate way of dealing with risks posed by seasonality and unpredictable pricing.

The report said: “These contracts offer benefits to the buyer and supplier as they guarantee the necessary flow of goods at a price which is sustainable for both parties.”

Milan Panchmatia, director at 4C Associates, said: “Seasonality can mean lack of guaranteed availability. Because they [firms] can’t buy futures on this stuff they don’t always know the prices they’re going to get part way through the season.”

The survey, of 255 UK food and drink industry buyers, also found 54 per cent of respondents recommended vertical integration of supply chains.

“Integrating a key supplier of non-traded goods into a business ensures a synchronisation between supply and demand for the given product,” said the report.

In terms of delivering sustainable savings, the report said demand management was the most popular strategy, cited by 72 per cent of respondents.

“At its most basic level, internal demand management is a process which enables procurement to effectively differentiate between a need and a want,” said the report.

“Procurement functions looking to effectively integrate demand management must focus on gaining a firm grasp on historical purchasing as well as current and future business needs.”

Panchmatia gave an example of a breakfast cereal manufacturer who saved 1 per cent of their costs by removing an ingredient. “They had ingredients in the products that had been put in historically, that actually when they took one out and tested it with members of the public, no one noticed,” he said.

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