I know, the title looks a bit like one of
those “Get rich quickly” offers. However, there is a way of getting advance
notification about the price trend. At least for mass-produced goods.
I know, the title looks a bit like one of those “Get rich quickly” offers. However, there is a way of getting advance notification about the price trend. At least for mass-produced goods.
To start, firstly we need to understand the COGS of our goods.
COGS — Cost of Goods Sold
So here is a definition:
“Cost of goods sold (COGS) refers to the direct costs of producing the goods sold by a company. This includes the cost of the materials and labour directly used to create the goods. It excludes indirect expenses, such as distribution costs and sales force costs.”
Using COGS, we will figure out the main ingredient. Then, we can look for the price trend of this material. Based on this, we can have a leading indicator, showing us where the price will be a couple of months down the line. Combining this with the current economic information, you will have quite a good picture of the trends for the next 6–12 months.
Examples
Here are some examples from my career. Knowing the price trend helped me to make a strategic plan and negotiate better contracts.
Stainless Steel
The stainless steel products I was trading were mostly materials produced based on the DIN 1.4301 (AISI304) standard. This metal is a composition of:
- 18% of Chromium
- 10% of Nickel
The rest is iron
As Nickel is the most expensive (and volatile) element of this mix, we closely monitored the relationship between the price of Nickel and Stainless steel.
Here are the latest data:
Since we know that it takes approximately 90 days for our manufacturers to turn the ordered material into goods we were selling, all we needed to do is to go to:
LME Nickel | London Metal Exchange
And we would know where the price will be moving in the next three months. I have shared this data with the management every month. Based on this, we would:
- price goes up: stock up, and make extra profit, as we always sold at market rate
- price goes down: stop orders, reduce stock and wait for a stabilization or upward trend.
Poultry
One more case where you can determine in advance what price you will be getting in the future. In the market I worked with poultry (UAE) the large majority of poultry comes from Brazil. So we figured out that the difference between the Brazil price and the UAE price is exactly 400 USD/ton.
As a large consumer, we always had annual contracts. But knowing what the price the distributor paid for his stock in hand created a great negotiation basis. Also, if we see the prices dropping significantly, we will go back and ask for an extra discount. Vice versa, if the trend is the opposite, we will push the end of our current price deal further into the future.
Here is our source of data, which we then compared with other sources
Manufacturers Of Whole Chicken Distributors | BrfSaGlobal | São Paulo
Tissue
Another product where one ingredient forms the majority of the COGS; is pulp. Pulp is about 85% of the tissue. Hence, knowing the pulp price trend means that you can predict the tissue price as well.
The top 4 producers of Pulp in the world are USA, Brazil, China, and Canada. Hence, it is a cheap product, transportation costs influence the total cost significantly. So, for the Middle East, we could focus on one raw material market: China
Here is the recent data from Kraft Pulp – Price – Chart – Historical Data – News.
Seems negotiating the price during summer would not be the best time.
Yet, we have as well to take into consideration the exchange rate between your currency and the Chinese Juan.
To conclude
These predictions are made based on historical data. And as we know, historical data is not an indicator of future price movements. However, trends in raw materials rarely change overnight.
Find the raw material that influences significantly the movement of the product you buy. A lot of information can be obtained from your supplier. And then experiment a bit. Make a prediction based on your inputs and see how it plays out. After a couple of successful guesses, inform your management.
Actions like this truly show the management how procurement can be a valuable advisor to the business. Not only the admins that create contracts and negotiate prices.
