How fixed-price raw materials contracts are hindering firms

17 November 2020

Firms have failed to exploit a drop in the price of raw materials to cut procurement costs, according to a report.

In a report procurement consultancy Inverto said a survey showed seven in 10 (71%) firms hadn’t benefited from low prices in the raw materials market, especially crude oil.

The report said fixed-price agreements and a lack of transparency around sourcing of materials, resulting in an inability to renegotiate prices, had been the main barriers to better prices.

The pandemic has caused a fall in demand resulting in overcapacity and price discounts, with over half of firms (53%) expecting raw material prices to stay the same or decrease in the next 18 months, according to Inverto, a subsidiary of Boston Consulting Group.

Over two thirds of firms (69%) were confined by long-term fixed price agreements which included raw material costs, while only about a quarter (24%) didn’t use any fixed price agreements.

The report said a “lack of transparency and quantifiability of the savings potentials” from a drop in prices meant only 29% could achieve better conditions through renegotiations.

Lars-Peter Häfele, MD and raw materials expert at Inverto, said: “The crisis reveals only companies that also have transparency about hidden raw material costs in finished products and actively manage them can gain direct advantages from short-term market price changes.”

Inverto conducted an online survey between May and June involving 78 procurement leaders and raw materials buyers from UK and German companies primarily in the manufacturing, metals, and mechanical and plant engineering sectors.

According to the September SM Commodities Index, the price of crude oil has decreased year-on-year by 34.7%, natural gas has dropped by 23.3%, and nickel by 15.9%.

The survey said 27% of firms were able to use lower oil prices to reduce raw material costs, but 15% believed there was no potential to take advantage of low costs, and 8% already had fixed price contracts.

Raw material prices were only seen by 35% as a significant impact in 2020, despite raw materials making up over a third of the total purchasing volume for 56% of firms.

Häfele said many companies acted on the “fundamental misjudgement” that they didn’t need to manage raw material costs as prices can’t be changed, resulting in missed opportunities “to gain a substantial advantage over the competition”.

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