Five Pitfalls of Metals-Based Sourcing

Thursday, September 17, 2009 8:37
Comments Off on Five Pitfalls of Metals-Based Sourcing

Earlier this week I received an email titled Five Pitfalls of Metals-Based Sourcing from old friend Lisa Reisman of Metalminer (her husband Jason writes Spendmatters) where she laid out what she sees are the five essential mistakes people make when sourcing metals in commodity form.

  1. Misreading the supply market can result in the placement of large resting or standing orders as prices decrease, or in failing to place large, timely orders to avoid price increases.
  2. Using a 3-bid monthly buy. Here the buying organization believes it has purchased at or below market because it went with the supplier who offered the best pricing and terms on a monthly basis, for that month’s orders. But bidding on a monthly basis is almost never the best lowest total cost option. In fact, we’d go so far as to say that companies that deploy this practice, nearly always have a substantial cost-savings opportunity available to them.
  3. Failure to implement index-based buying strategies. The result here is a lack of visibility into the actual costs that comprise the delivered price.
  4. Assuming that a buyer’s size or reputation guarantees that it receives the best price. Without using data to validate its assumption, the buying organization believes that because a particular supplier has been a “partner” for many years and receives $Xm of business from a customer annually, the supplier must be supplying at “better than market” prices.
  5. Making purchases by unit or each, rather than by weight. There are a couple of exceptions where this practice is advantageous, but it generally is not. We have seen instances where suppliers/producers “ship light” selling metal on a unit cost basis that results in the buying organization overpaying for materials. Moreover, buying on a unit or each basis can prevent the buying organization from seeing the true costs (such as the raw material and the fabrication costs) that make up the total price.

It is a piece that is backed up by her recent white paper (download here), and I have a few comments on the above based on my own experience.

1.  Her first observation is spot on.  There is a lot of speculation in the market about the true source of demand for metals, and there is plenty of evindence to suggest that a lot of recent demand driving prices up is artificial (investors and mis-allocated funding from SOEs).  It is a dynamic market that has seen large swings in pricing, and while opportunities to buy on the dips exist for manufacturers/ traders, if one were a commodity trader the market could easily swing against you.

For myself, the last 6 months were a great time to stock up.  AL pricing was off nearly 50% from the highs of 2 years ago… and there was space in the warehouse.

2. This is an observation that I would say largely depends on the purchase cycles, sizes, and needs of the buyers.  3 month averaging is a great way to flatten things out, but if you were buying at 24,000RMB/ ton 2 years ago and it is swinging from 13,000 to 16,000 now, then perhaps some firms may find going to a month to month or spot market advantageous.  Especially if holding cash, and are willing to store for a few months

3.  Totally agree. For our largest client, we actually provided a spreadsheet where current RMB and metal pricing could be changed, and the final landed price would appear.  they really liked that level of transparency.

4. Without knowing the spot market prices in China, companies are in the dark, and trusting someone else to manage a commodity purchase in the blind is just asking for it.  Firms need to play an active role in managing these commodity costs, especially if the order sizes are significant.

5. This is an area where my experience differs a bit.  We have largely used per piece pricing, but we have people on the ground checking for quality and cross counts occur at multiple steps in the process.  Were we an offshore buyer with no one to count, then I would agree..  however, then the issue of alloys can easily become an issue, nd weights can be fudged.

Anyone else out there have a similar/ different experience to report?

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