Why Procurement Teams Must Manage Raw Materials Costs
According to research by supply chain management consultancy INVERTO, part of Boston Consulting Group, 65% of companies anticipate rising commodity prices in the coming months, a significant increase from 48% last year. Meanwhile, only 13% expect prices to decrease, a sharp decline from 41% reported the previous year.
38% of participants say commodity prices are significantly impacting their business results. Procurement teams often do not pay as much attention to their company's raw materials management as required.
The study gathered responses from nearly 200 senior decision-makers in procurement and management, predominantly from France, German-speaking countries, Spain and the UK. Most participants come from manufacturing, mechanical engineering and the chemical industry, though service and retail sectors were also represented.
82% of surveyed companies have procurement volumes exceeding €100 million (Approx US$105.6m). The survey was conducted between March and June 2024.
- Geopolitical supply chain disruptions such as the Red Sea crisis – 40% of businesses say that geopolitical risks have driven changes in the source of their supplies
- Economic downturn affecting demand for commodities in global markets
- Geopolitical tensions affecting the supply of raw materials, including graphite, gallium and germanium
Increased flexibility through new sourcing strategies
INVERTO's research highlights how, in preparation for the potential price increases and uncertainties, companies are focusing on greater flexibility and adaptability in their procurement of raw materials.
There are some concerns from companies about the price increases across their supply chain – including price increases driven by the introduction of new tariffs on important key components of raw materials.
- Increasing use of dual or multiple sourcing of raw materials (51% of respondents say they have taken this step)
- Implementing nearshoring strategies to shorten supply chains (39% of businesses have taken this step)
- Focusing on friendshoring – establishing supply chains in politically aligned regions – to safeguard supply (26% have taken this step)
Procurement teams must be proactive
Lina Tilley, Principal at INVERTO, says: "With raw material prices continuing to be volatile, there is a much bigger role for procurement teams to play in managing raw material costs. This isn't happening as regularly as it should, however."
Lina adds that procurement teams, particularly in industrial sectors, must emphasise managing down pricing of raw materials. However, this is not always seen as a core part of their work – in particular, as they mostly do not buy commodities directly, but parts, including commodities.
"We often find that finding and securing better prices for raw materials isn't seen as part of a procurement team's role. Frequently procurement teams lack the skills and resources to be able to do that effectively. Monitoring relevant price indices and responding to changes isn't something they are expected or empowered to do.
"Upskilling procurement teams and giving them the tools they need to really add value is increasingly important for industrial businesses. If a procurement function doesn't have the solutions and data sources it needs, it won't contribute to the bottom line in the way that it would be able to."
Maximising transparency
Lina advocates leveraging digital solutions and generative AI (Gen AI) to enhance data and market transparency in procurement. By automating market monitoring, businesses can detect potential price volatility early, enabling fast and proactive responses.
However, Lina argues that investment – in data quality, system integration and employee training – is critical to making digital solutions effective.
"Companies can achieve significant cost savings by gaining a comprehensive understanding of their supply chains," adds Lina.
"Digital solutions and Gen AI in particular can make that process far quicker and more efficient. That will require investment on the right scale to make the right impact.
"Another lever procurement teams can pull is proactively engaging in the product development process at the early stages. This can ensure that any raw materials used in a new product have been considered from a market-price-volatility perspective."
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