Commodity Cycle & Supply Chain

"Elephants don't change directions very often, but when they do, it takes a lot to make them turn back again".

Commodities have a lot in parallel to that. History exhibits that commodity cycles don't change very fast but when they change the direction its a multi year phenomenon with probably some hiccups on the way.

Supply Chains from various industrial sectors will need to align themselves differently. The alignment & much needed adjustment with the commodity super-cycle is a function of multiple things.

a. Commodity cost contribution to the overall Supply Chain cost - While many believe that Steel price increases would hurt badly, its not true for all equally. e.g. A Supply Chain analyst may believe that in case of Ship building industry the steep increases in steel prices would hurt. I was listening to the CMD of Garden Reach Ship Builders & Engineers, where he said that steel contributes only around 1-3% of the overall cost. So the steel prices increase has very less impact on over all cost than what is generally perceived.

b. How much of the cost increase can be passed on to the customer? - This where the industry that your company belongs to, your brand image, your positioning vis-a-vis the competitor makes an impact. Take an example of Paper industry where input costs are on a tear. A company like ITC paper boards whose brands have a customer loyalty may be able to pass on reasonable cost increases to its customers. Some other company may not.

c. How much of cost increase can be compensated with productivity improvement? - During the times of sustained Commodity price increases, Supply Chains need to focus on cost improvements. One way to improve cost is to improve productivity. In a call where the senior management of Lemon Tree was speaking they have expanded their EBITA margins during these times. Its only due to the Lemon Tree Hotels single minded focus on leveraging on interventions of productivity improvement (e.g. Digitization) to offset the input cost increase, which as we know in Hotel industry hurts the most as its wage & commodity together.

d. Supply Chain Managers need to study their own commodity cycle - Not all commodities peak at the same time neither to they bottom at the same time. Studying inter-linkages with different commodities/asset classes can give Supply Chain Managers a fair understanding of where does the individual commodity stand in its own cycle. For an example, while majority of metal, non metal & agriculture commodities have made all time highs & correct, a commodity like Silver is still 50% away from its peak. If commodities have their cycles, Silver also should have its own way to the all time high sooner or later. There is a need to make an analysis of the commodity bearing this in perspective too.

e. Wage inflation is rapidly increasing - For a service focused or labour intensive enterprise its a commodity which contributes the highest to its cost structure.A software company may find scarcity of resources leading to higher cost of acquisition of manpower. Wage inflation normally don't last too long before there is a bust or moderation in the wages. In the world we currently are, a rapid wage inflation will probably hasten the digitization of the Supply Chain.

Supply Chains of different industries shall need to orient their Supply Chains for the commodity cycle which may last for a few more years than a few months or weeks.


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