Cost Control

Commodity buyers turning to online exchanges for lower cost, says Forrester

CAMBRIDGE -- BUSINESS WIRE --September 18, 2000 -- With the advent of online markets, commodity buyers increasingly will use e-marketplaces to control the costs of their raw materials. A new report from Forrester Research determines that while most commodity e-marketplaces can't yet muster the volume required to create Nasdaq-like exchanges, information flowing from these venues will empower purchasing managers to attack their supply chain costs.

"We found that commodity buyers are eager to move online," said Jim Walker, senior analyst, Forrester Research. "Buyers will increasingly use e-marketplaces to attack costs in a variety of ways. Initially, they'll intensify the competition for their existing contracts. As pricing indexes emerge, firms will adopt shorter-term, flexible contracts and use financial products like swaps and options to control volatile prices."

Forrester concludes that raw materials purchasers will use online venues to exert increasing control over upstream suppliers by expanding their online buying through four stages: 1) intensify competition; 2) unbundle supply chains; 3) transition to spot markets; and 4) manage price volatility.

In the first stage, buyers will use e-marketplaces to increase the competition for their business by unearthing new suppliers, leveraging pricing levels in negotiations, and forcing vendors to participate in online reverse auctions.

Stage two results in the unbundling of commodity supply chains. Smart OEMs will leverage online markets to negotiate separately from each of the players that handles the processing of their raw materials. After splitting out fabrication from the purchase of the basic commodity, OEMs will experiment with nontraditional vendors to satisfy their peak capacity needs.

Commodity industries will see a transition to spot markets in stage three. As e-marketplaces create reliable pricing indexes, buyers will move from reading monthly pricing guides to tracking these intraday listings. Using these widely accepted price levels, buyers will build variable pricing into their long-term contracts and move a larger portion of their commodity purchases into short-term deals.

After squeezing costs from their raw materials supply chains, buyer will turn their focus on another problem: fluctuating prices from uncontrollable variables like weather patterns and interest rates. In the fourth and final stage, OEMs will leverage financial instruments to secure guaranteed pricing levels and to protect themselves against severe price spikes.

"While buyers will move through four stages of cost control, they will not move at the same pace for every commodity," said Walker. "Industries will make the transition to managing price volatility at different rates depending upon the risk of price shocks, the range of supply alternatives, and the availability of benchmark prices."

For the report "Reining In Commodity Costs," Forrester interviewed 35 purchasing executives from large firms that either use these e-marketplaces today or expect to start using them within the next six months.