Sourcing Raw Materials - Looking Beyond Price

There’s no doubt, sourcing raw materials, like many categories of spend, is nuanced. Impacted by a number of factors, it comes as no surprise that costs of raw materials are subject to fluctuation in the market place. So, when it comes to purchasing raw or direct materials, an organization cannot just take a look at pricing trends, conduct a three-bid-and-buy, and call it day on their sourcing initiative. Smart purchasing only begins with pricing trends, but also includes other factors such as assessing the various economic and environmental drivers impacting supply and demand, and additional contending supplier operations. Before signing your company’s name to the dotted line with a seemingly competitively priced supplier, there are a number of considerations to keep in mind to assess a best-fit provider beyond their proposed pricing:

Climate Condition and Risks to the Supply Base

Companies are quickly realizing the impact climate challenges have on their business models and operations, including the shortage of key resources. Storms and other natural disasters are major disruptions for supply chains resulting in damaged facilities, reduced product demand, and lost productivity. As a result, organizations must take a look at not only the geographical regions of their supply base and understand the potential threats of natural disasters, but also the supplier’s ability to prepare and respond to minimize the cost of a supply chain disruption, should the worst case scenario occur. 

Political Environment

Global sourcing is often an enticing and in some cases a necessary option for organizations sourcing raw materials, offering lower costs, new opportunities, and access to unique resources. Along with these benefits, so comes the political risk of sourcing in these new territories. Companies looking to globally sourcing raw materials must be strategic and systematically assess the political risks associated with the region or country. While pricing may be lower in other countries, procurement departments must also take a look at the regulations in place that impact other areas of operations, and as a result, costs such as insurance, logistics, customs, and international banking fees. 

Quality Assurance

While reducing costs for many procurement organizations sounds like an immediate win, in some cases it may come at the expense of quality, compliance, and sustainability. Comprehensively assessing your suppliers and verifying product quality and conditions is critical. This may include obtaining references and conducting facility tours.

Distribution and Logistics:

Understanding the network used by your contending providers to supply a facility is crucial to determine the ideal structure to support your organization’s needs. For example, a low cost supplier may not be equipped enough with the necessary tanks to store the material to be delivered on a timely basis. As a result, in addition to proposed pricing companies must also look at a supplier’s delivery method and lead time, and the availability and capacity of storage facilities.

Companies need to not only look at the past changes in the costs of these raw materials, but also anticipate how these considerations impact future changes in costs. These drivers impact the costs of a raw materials regularly, and must be monitored proactively to ensure a company is making smart purchasing decisions.  However, many organizations lack the time and resources to manually track all the constant market changes relative to a particular commodity. This is where predictive analytics can help. Predictive Analytics provides increased visibility when managing costs and suppliers – working to streamline the strategic sourcing process by taking into consideration market changes, data, indices’ commodity pricing, and other factors. With clear insight into these market changes, organizations can make smarter and faster business decisions in regards to validating pricing and sourcing the best-fit supplier. 

This is just one of the many benefits of implementing Predictive Analytics in strategic sourcing and procurement.  To learn more about the advantages and new opportunities of Advanced Analytics, check out Source One’s latest whitepaper: “The Future of Spend Management: Predictive Analytics.” The new white paper explores the gaps that lie between traditional and advanced analytics and how utilizing these tools is shaping the future of procurement.