The Role of Commodity Management in Sourcing and Procurement

In today's world, effective supply chain management has become one of the factors that gives businesses across all industries a competitive edge in the market, and for the supply chain to be effective, there must be an effective commodity management process. Commodity management cuts across diverse industries from manufacturing to construction, agriculture, the public sector, and any organisation needing expert procurement process management. In the present global economic climate influenced by rising tariffs, pandemic outbreaks, regional wars and international unrest, technological evolution, complex and ever-changing regulations, and diverse customer preferences, the commodity market has become very fragile and volatile, leading to a high level of risk and unpredictability in the supply chain. While some businesses proactively source and procure goods, others source and procure reactively based on  immediate need and demand. However, the cost of goods and the company's budget for such procurement are usually determinant factors.

Commodity management explained

Commodity management is the process of managing the procurement, and distribution of raw materials, intermediate goods, and finished products. It entails identifying and evaluating potential sources of supply, negotiating contracts and prices, managing inventory levels and logistics. 

Simply put, commodity management is developing a systematic approach to the entire usage cycle for a group of items. 

Suppose commodity management processes are judiciously utilised in an organisation, it helps save cost, mitigate risk, promote positive relations and collaboration with manufacturers and suppliers, promote the business's visibility, reduce lead times, and optimise inventory management while enhancing productivity and overall efficiency.

Over the years, technological software has been incorporated into commodity management to make it even more strategic and efficient. Openlink and Vesper can now be used for data collection and analysis, helping better decision-making.

Importance of commodity management to businesses

Commodity management occupies a significant and strategic position in business management, adding tremendous value to the business in different areas.

1. Cost optimisation: Commodity management helps businesses save costs through a strategic partnership with manufacturers and suppliers. Expert commodity managers always seek ways to leverage long-term business contracts and partnerships to negotiate for favourable pricing and cost-effective business conditions. Also, commodity management, sourcing, and procurement processes are often streamlined, reducing waste and saving costs. 

1. Risk management: Commodity management helps in risk mitigation by bringing dual or multiple sourcing options and diversification in the supply chain, thereby giving a business alternative procurement options or routes in times of disruption, delay, price instability, volatility, geographical instability, or other events that could pose a risk to the business. With strategic commodity management, companies can better navigate these challenges and remain competitive. 

2. Business continuity: Strategic commodity management involves planning and forecasting based on analysing available data to assess and manage risk, anticipate demand, optimise inventory, and ensure business continuity. With the analysis of these data and previous occurrences, it will be easy for businesses to determine what is best for the company and the clients and the possible risks in the supply chain. 

3. Business flexibility: In today's dynamic and complex business environment, change is constant, ranging from freight rates to manufacturing cost, customer preferences, technology and processes, regulatory standards, and required documentation. In this situation, only an effectively managed business will survive, and that is what commodity management brings to a business. With effective commodity management, companies can align themselves with changes and new trends in the industry. Strategic Commodity Management enables supply chains to respond quickly to changing market conditions. Businesses can adjust procurement strategies, inventory levels, and production schedules by analysing past events and closely monitoring demand patterns and global occurrences.  

4. Improved efficiency and competitiveness:  Commodity management improves efficiency and enhances the market value and competitiveness of a business by streamlining the procurement process, which will, in turn, lead to a reduction of lead times, inventory optimisation, and customer satisfaction. Additionally, businesses will become more competitive in the market by reducing costs, reducing lead time, and improving efficiency through effective commodity management.

5. Environmental sustainability: Commodity management promotes ecological sustainability by collaborating with manufacturers that adopt sustainable practices in the manufacturing processes. This way, in a bid for visibility and more customers, manufacturers will continue to observe sustainable practices in their manufacturing processes.

For organisations that desire to optimise their sourcing and procurement processes in order to maximise profit and enhance overall long-term business efficiency, commodity management is critical.

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