How To Manage Fluctuating Raw Material Prices

The global business climate is ever-changing and, in many cases, uncertain. Prices for raw materials businesses require for operations constantly fluctuate, creating risks of significant financial consequences for the organizations. 

Throughout this guide, we will explore the main reasons behind the fluctuating prices of raw materials, the industries that are most affected by fluctuations, and the best strategies to manage price fluctuation effects on the business. Let’s dive into it! 

Importance of Risk Mitigation Strategies 

Before diving further into the article, let’s overview the importance of risk mitigation strategies for procurement departments, especially when it comes to price fluctuations. 

• Contributes to financial stability. A risk mitigation strategy regarding price fluctuations helps to minimize the impact of unexpected cost increases and helps to protect the company’s financial stability levels. 
• Consistent supply chain. Minimizes risks associated with supply chain disruptions, ensuring consistency even during market volatility. 
• Long-term planning. Contributes to long-term strategic planning initiatives, allowing companies to forecast potential risks and create effective mitigation or management strategies. 
• Helps with budget management. Price fluctuations affect budgets, yet effective risk mitigation strategies allow for maintaining budget stability and avoiding last-minute or maverick spending. 

Main Reasons Behind the Rise in Raw Material Costs 

To understand the full picture, it is vital to consider the main reasons behind the rise in prices of raw materials in today’s market. 

For instance, over the past few years, Covid 19 was a major contributor to this. It had a major impact on global supply chains and the costs of raw materials. 

Another factor that affected and to this day affects the cost fluctuations of raw materials is the Russia-Ukraine War, which disrupted the production of several commodities, such as energy, fertilizers, and grains. 

Overall, political factors and trade tensions play a major role in raw material price fluctuations. Examples of such are the United States and China throughout past years, the imposition of which increased tariffs on the import and export of various raw materials. 

Most Affected Industries by Rising Raw Material Costs 

The rising costs or more prominent cost fluctuations are especially common among industries such as food & beverage, packaging, automotive, and energy. 

For instance, the automotive industry relied on raw materials such as aluminum and steel, as well as other vital materials such as rubber and copper. Well, the prices for all of these raw materials constantly fluctuate. According to the report by the World Bank, back in 2022, when the Russian and Ukrainian wars started, the prices of aluminum and copper rose. 

Another example is rising prices in the food and energy industries, which are largely correlated. As the publication by BBM notes, the rise in energy prices automatically impacts the food production industry, which requires lots of energy to take care of aspects such as transportation, processing, and packaging. According to recent data, the price of electrical power keeps rising, affecting other industries. 

Top Strategies to Manage Price Fluctuations and Supply Chain Problems 

Finally, it is time to dive into the practical section of this guide and explore the top strategies for managing price fluctuations and supply chain disruptions within the business. 

Allocate Cost Increases 

First, make sure to allocate budgets for possible cost increases. Of course, it is better to negotiate long-term contracts to avoid the effects of cost increases, but thinking it will not affect your organization puts it at risk of losing cash. 

Thus, make sure to allocate a budget for potential cost increases. It will help to efficiently mitigate risks without affecting the business’s cash flow as the risk was anticipated. 

Strategic Sourcing and Supplier Diversification 

One of the most efficient strategies for managing price fluctuations and ensuring smooth supply chain operations is to incorporate strategic sourcing and supplier diversification practices into your organization. 

Strategic sourcing allows companies to secure cost-efficient deals in the long run. For instance, strategic sourcing involves supplier evaluation based on important factors such as quality, reputation, reliability, and pricing. By evaluating previous interactions with the suppliers or their overall reputation in the marketplace, you can proceed with collaborating with the most reliable ones. 

Even though you want to have key suppliers with long-term contracts, it is still important to diversify your supplier base. For instance, you can have one reliable supplier for the delivery of X raw material, and the vendor will never let you down. They always performed well, delivered on time, and had good quality products. There is no need to have another one to deliver the same material, right? WRONG. 

In the modern business world, emergencies can take down companies or influence their operations. If something happens to your key suppliers, it will affect your supply chain and your business. Thus, it is vital to diversify the supplier base to mitigate risks associated with supply chain disruptions. 

Create an Agile Supply Chain 

Another strategy to improve fluctuation in raw material prices is to create an agile supply chain. Such a supply chain will benefit your organization in many ways, including enhancing inventory management, minimizing stockouts, and minimizing holding costs. 

A few tips and strategies for creating an agile supply chain include: 

• Manage based on data. The main focus of the agile supply chain is information, not inventory. This means that businesses must incorporate dynamic “pull” models instead of traditional “push” models. The “Pull” model, unlike the “push” one, is customer-centric and driven by real market trends and point-of-sale demand data. 
• End-to-end collaboration. A huge part of the agile supply chain is collaborating with carriers and suppliers to understand all the opportunities that can be used to improve a business’s flexibility. 
• Responsive systems. Make sure to develop responsive systems such as sales and operating plans to remain flexible and maintain high levels of adaptability. 
• Resilience and risk management include 24/7 control to detect supply chain disruption risks and continuously analyze impact. To gain 100% visibility and control over procurement processes, you can incorporate the right software solution.

Focus on Adopting Sustainable Practices 

A great way for the organization to mitigate the impact of high raw material costs is to adopt sustainable practices. Sustainable practices include waste reduction, recycling, and other ways to optimize resource utilization efficiency to minimize consumption. 

For instance, renewable energy and recycled raw materials can reduce companies' reliability with external suppliers. 

Here are a few strategies to incorporate for the adoption of sustainable practices: 

• Assess current business processes, costs, and their efficiency in terms of sustainability. 
• Start investing in energy-efficient technology and update machinery to reduce overall energy consumption. 
• Source from sustainable suppliers who use renewable energy sources and practice stable pricing. 
• Start using recycled materials. Incorporate recycled raw materials in production to decrease reliance on external suppliers and mitigate the impact of price fluctuations. 
• Leverage and engage in circular economy practices. Develop strategies to reuse and repurpose products and materials within your supply chain to reduce the need for new raw materials.
• Adopt renewable energy sources within the organization to reduce costs associated with production. 

All of these practices will help you reduce costs associated with production as well, which will directly impact and contribute to more cash flow within the organization. 

Optimize Processes and incorporate Procurement Management Systems 

Procurement management systems are essential to enhance overall production efficiency and reduce costs associated with inefficient operations and waste. 

A good e-procurement tool will provide all the necessary features to efficiently optimize and streamline procurement processes ranging from inventory management to PO and Invoice management. 

With the right solution, your procurement team can reduce manual effort and focus on more strategic business initiatives, such as negotiating better deals with suppliers in times of crises or rising prices. 

Also, procurement software solutions such as Tradogram provide organizations with full spend visibility and spend control features. These allow businesses to identify spending patterns and cost-saving opportunities with ease, eliminating hidden costs and maverick spending. 

Most importantly, procurement software solutions allow the integration of all of the above-mentioned strategies to deal with fluctuating raw material prices with ease and precision. With the right procurement tool, you can strategically source suppliers, take control of your business spending, incorporate sustainable practices, and ensure compliance with these.  

Continuously Improve 

To manage fluctuation in raw material prices, make sure to improve every procurement-related process continuously. You need to constantly look into data and identify patterns and areas for improvement. 

Manage Price Fluctuations and Business Spending with Tradogram 

If you are looking for a software solution to manage spending, control budgeting, and mitigate risks associated with price fluctuations, then you are in the right place. Tradogram is an all-in-one robust procurement management software that comes in handy with all the necessary features to streamline procurement processes. 

Tradogram offers features ranging from supplier performance management and inventory management to spend analytics and customizable reports. With this platform, you can optimize procurement processes within your business and increase ROI rates. 

To find out more about how Tradogram can help you efficiently adapt to price fluctuations and take control of procurement costs, schedule a free demo with our team.