Strategies for contracting volatile agro commodities

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By: Jayamurugan P -- Associate Research Manager

24 May, 2016

Strategies for contracting volatile agro commodities
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With raw material volatility and fast changing supply markets, the focus of procurement is shifting from reducing cost to managing volatility.

Here are few tips for those in charge of procuring Corn and its derivatives. This strategy broadly applies to other agro categories as well.

Corn and its derivatives are used in multiple applications. For example, in Soft Drink industry both HFCS and Polyols have different uses, so it is very important for a procurement manager to optimize the procurement spend.

Corn Derivative

FBT

Feed

Pharmaceutical

Paper  Industry

Corn Grits/Corn Cobs

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Corn Starch

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Corn Ethanol

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Corn Gluten Feed

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Corn Gluten Meal

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Corn Steep Liquor

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Corn Germ Oil

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HFCS

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Sorbitol and other Polyols

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Dextrose/ Glucose Syrup

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Maltodextrin

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Modified Starches

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Always have multiple vendors:

In order to get best price and drive competition among selected vendors, ask for Price Quote that is 1.5X of your monthly need and get the best price quote from all vendors. Also try to consolidate your SKUs with limited suppliers.

  • Reward 75% of the volume to least quote/best suited vendor and split 25% to the second and third least quoted vendor.

  • Though the price quote was 1.5X, guarantee only 50% of 1.5X of the volume to 1st vendor (i.e., 75% of monthly need) in the contract and give the remaining to 2nd and 3rd vendor.

  • Make sure the negotiation with each vendor is very strong so that the difference between vendors is minimal.

By doing this exercise, you get better price through higher volume.

Always have multiple vendors from both manufacturers and traders community:

Manufacturers will always try to sell at market prices, while traders will try to maximize the opportunity through stocking/importing from low price country. In order to get the best of both worlds, maintain a minimum of 2 manufacturers and 3-5 traders in your selected vendor list.

By doing this exercise, you can be assured to get the best quote in both bullish and bearish market either from a manufacturer or trader.

Distribute your purchase:

Distribute your monthly volume every week or fortnight, so that:

If price is flat

You can reduce the storage, insurance and wastage loss.

If price is increasing:

  • You can order on and above your weekly/fortnightly need and procure 50% -100% of volume required for the subsequent month. Thereby you can avoid price risk and maintain the price for the next month.

  • Since you have asked the price quote with multiple suppliers and finalized the deal with one supplier, you can negotiate with 2nd and 3rd supplier to supply some volume required for the next month.

  • Also by following FIFO system you can control the shelf life of a commodity.

If price is decreasing:

You can order exactly to your weekly/fortnightly need, and meanwhile you can negotiate with players in the open market or a player who would wish to be in your vendor list. By doing this you can save cost on your procurement and encourage the new player to be on board and induce competition among your existing suppliers.

Try to maximize your DPO:

Now most companies are finding it tough to alter the Days Payable Order (DPO) from Net 30 days to Net 60 days for managing their working capital. By distributing your purchase every week/fortnight, you can close the invoice on the last day of the month and your NET 30 can start from the date of your invoice closure. This will help you to increase the DPO on an average by 15 days. Also the vendors will not find it difficult as they won’t be locking 100% at the beginning of the month.

Call for open vendor meeting every month:

It is always important to make your vendor aware of other vendors in order to induce competitive spirit. This will also help the vendors as they would know who their competitors are and can prepare their business plans accordingly. Your company can also institute Rewards and Recognition for best performing vendors.




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