As the focus of a recent sourcing engagement, I have been working to help a client diversify his polypropylene supply base while driving cost savings. Considering the client’s stringent requirements for efficient, reliable delivery and a resilient “run on any machine, at any time, under the supervision of any technician” film, many foreign suppliers were off the table from the get-go. As a result, we ended up working with several brokers to identify domestic suppliers that could provide local warehousing, next-day delivery, and an exact “drop-in” replacement match for the film the client was currently using. As of right now, we have qualified a competitive alternate supplier for testing, driven significant price reduction, and are ready to roll with the implementation process.

During our last status update with the client, we let him know that producers were expecting an industry-wide increase in polypropylene films that could be as high as $0.06/lb. Although he initially thought the increase estimate to be a little high (which it may be), we explained to him that, in the coming months, propylene and polypropylene will experience upward pressure from two angles. On one hand, the price of crude, which propylene indexes follow, is making a fairly solid upward run as the summer driving season begins. On another, the surplus that resulted from slack demand during last year’s fourth quarter is beginning to dissipate. As supplies tighten, polypropylene prices should see an additional, moderate bump.

A recent article in Purchasing magazine (Pg. 32C1) touches on these issues and also presents some other opinions on the potential future of propylene and polypropylene prices. The article points out that while some purchasers are taking advantage of the low pricing while they can, others, like Michael Scott of Braeside Displays, would prefer to risk taking on future increases in order to hold on to valuable cash-flow. Others still would argue that propylene prices were suffering before the economic crisis and will remain low into the future. The article cites Bob Dennett of Chemical Market Associates as saying, “We’ve had three or four years of negative domestic growth in polypropylene. And looking at the economy the way it is, with our forecast of GDP, we’re looking at another year of negative growth for 2009.”

With any commodity as potentially volatile as propylene, purchasing managers need to be aware of the drivers the affect the cost of the commodity and amply assess the commodity’s price risk. Once they have some metrics in place to understand the level of risk associated with the commodity, they then must determine how adverse their organization needs to be to this risk. In some cases companies may have the resources to proactively attempt to capture future savings by building inventories now. In others, the risk of substantial price increases may not be great enough to warrant the cash trade-off. Either way, managers must be sure to adequately assess their position in relation to the commodity. For some info on polyethylene price increases check out this article on
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Steve Tatum

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