News
Thursday 17. November 2011
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| When prices go haywire |
| How companies can handle exorbitantly fluctuating raw material costs even without additional financing. |
| Julia Leendertse Andreas Picolin knows perfectly well sandwich positions and raw material rallies. The board member of Nordenia International AG – a manufacturer of film packaging and components from Münsterland – buys every year hundreds of thousands of tons of oil-based plastic intermediate products from such mineral oil or chemicals giants as Exxon or Dow Chemical. Nordenia subsequently processes the raw materials to packaging films and sells them to major consumer goods and food groups. Until recently, the globally set up plastic processing company had been able to still live well despite its sandwich position between the giants on both the supplier and the customer side. "When raw material prices were up, processing companies like ourselves always had to prefinance already for certain periods in the past but the resulting losses were compensated again by windfall profits in the down phases", says Picolin, the head of Nordenia. But for a couple of months already, prices for oil-based plastic intermediate products have been going haywire. One example: Within the last three years, high-pressure polyethylene had cost on one occasion EUR 700 and then again EUR 1,600 per ton. This calculation only works out for Nordenia if the company is able to tie up not too much liquidity due to excessively filled inventories, and pass on price increases to its customers as soon as possible without having to entirely forego windfall profits at the same time. "For 75 percent of our customers, we usually adjust prices quarterly via price escalator clauses", says Picolin. "Thus, the risk of being stuck with price increases is already very much minimized." But the trend on the supplier side to adjust prices for raw materials ad hoc is increasingly in contradiction with customers' demand to obtain packaging materials at prices which are to be fixed for three or even six months. Picolin: "So that things settle down in the supply chain, we therefore aim at monthly price adjustments on the customer side." Like Nordenia, every second small and mid-sized company in Germany has a hard time fighting the huge raw material price fluctuations. That was the result of a poll by Commerzbank among 4,000 owners and managing directors of small and mid-sized businesses. "A big problem is the uncertainty in planning", says Dirk Schäfer, Managing Director Projects of the Düsseldorf-based consultancy Kerkhoff Consulting which consults companies in terms of purchasing and supply chain management. "Moreover, especially the processing industry is complaining about an ever increasing mentality on both the supplier and the customer side to negotiate procurement and sales agreements according to the motto 'take it or leave it'. On the supplier side, buyers from small and mid-sized businesses frequently have to do with globally operating corporate groups, according to Schäfer, and these groups make buyers face the choice of either ordering the raw material at the specified price within a short time span or just end up with nothing. At the same time, he says, payment terms would be limited to 14 days. "On the other side of the sandwich, the globally working customers from the world of big corporate groups with their purchasing power will corner the sales staff of small and mid-sized businesses, and demand the longest possible payment terms as well as the longest applicable fixed prices. The problem is: For those stuck in such a sandwich position, price escalator clauses will usually not help anymore. But the small and mid-sized business sector does not stand by idly in the face of increased pressure in procurement and sales. According to the Commerzbank study, 47 percent of Germany's small and mid-sized businesses are currently looking for new suppliers. Just as many negotiate longer delivery contracts with vendors; one third is reinforcing their purchasing forces with good personnel; one fourth tries to strengthen purchasing power through purchasing cooperatives; 14 percent stock up their warehousing capacities; ten percent use special financial products to hedge their price risks. On the sales side, 42 percent of the companies use price increases to pass on rising raw material prices to their customers. "Prerequisite for more security in supply chains is that purchasing and sales departments as well as purchasing and financial departments work more closely together", says purchasing consultant Schäfer. "Because to be able to cushion the impact of major raw material price deflections, all parties involved must be able to promptly adjust to new price conditions or even delivery bottlenecks." The example of Kaco New Energy from Neckarsulm shows how companies can bring more transparency into their supply chains. The manufacturer of photovoltaic inverters is active on a market where business had always been fluctuating very much. Especially components had not been always available so that the company had its entire supply chain newly set up. "For two years already, we have been keeping in permanent contact with all upstream suppliers of our vendors and we are able to react on time to price changes and volumes to be procured", thus Jens Wagner, Chief Procurement Officer of KACO. The search for alternative materials is another way of countering hard to manage price fluctuations of raw materials. Accordingly, more than half the companies polled by Commerzbank consider innovations as the key for coping with resource problems. |
