When it comes down to it what do all companies have in common? Answer: The constant desire to increase profit margins. To do so, simple math tells us all we have to do is sell the product for more than it cost us to produce. Sadly, it’s not that easy. In all industries there are numerous variable factors that need to
be considered when making these calculations.
In the chemical industry one of these major factors is the commodity market. Due to the nature of the industry, nearly all chemical companies interact with the broader commodity market. This market is characterized by high price volatility making it a nightmare to manage. Prices can change by the hour decreasing profit margins and making future forecasts inaccurate.
In order to manage commodity price volatility, companies need to regularly transfer higher raw materials costs to their customers. However, because many companies run systems that don’t take this factor into account this takes time and forces companies to squeeze margins.
As chemical companies grow, the problem is only expected to worsen. With a limited supply of commodities and an increasing demand, price volatility is only expected to worsen over time. As companies expand globally the increasing global economy, political instabilities and the increase in natural disasters only increases price volatility. This creates major problems for companies who are unequipped with systems to deal with these constant fluctuating prices.
To do business in commodity markets, you need to quickly and accurately identify and hedge risk exposures, whether they stem from planned demand, sales, purchase contract, or held physical commodity positions. You also need to manage and optimize short-and long-run raw material
pricing. Essentially, you need a system that analyzes commodity prices in real-time to perform profitable commodity purchasing, selling, and risk management.
In the business world no one likes the unknown. Companies need to be able to measure profit margins accurately and make future predictions to drive company success. Having a system that manages the commodity market is essential for chemical to have to meet financial benchmarks.
How has commodity management affected your business? Do you have experience with commodity management systems? Use the comment space below to share your thoughts or join the conversation at @SAP4Chemicals