Last week, in a Supply Excellence exclusive, Charles Dominick, president and founder of Next Level Purchasing and author of the Purchasing Certification Blog, warned of the dangers of misreading commonly accepted economic indicators. Today, Charles reveals some of his best-kept secrets on how to assess commodity markets and where to find the best information sources to do so. He also shares his predictions for future supply and pricing trends.

SE: Your company, Next Level Purchasing, prides itself on training the next generation of supply management leaders. Do you offer specific courses on assessing and predicting supply market dynamics?

Yes, a couple of our courses in particular address supply market dynamics.  “14 Purchasing Best Practices” teaches purchasing and supply management professionals how to use market indices to benchmark their pricing and to determine appropriate pricing arrangements with their suppliers.  “Supply Management Contract Writing” teaches purchasing and supply management professionals how to use market indices in developing price adjustment (i.e., escalation/de-escalation) clauses.

SE: Can you share some tips for how best to assess commodity markets?

Each commodity market is different, but a general rule is to know exactly what factors affect the pricing and availability of the commodity for which you are responsible.  With some categories, it may be the production capability of suppliers or members of the supply chain.  With a category like paper, something like a forest fire can impact pricing.  With a category like steel, government decisions such as the imposition or lifting of tariffs can impact the market.  As we saw with Hurricane Katrina, natural disasters can impact the pricing of categories like petroleum and petroleum-based products.  After knowing the factors that affect the market, the purchasing and supply management professional needs to identify the risks and the probabilities of each of those risks coming to fruition.

SE: Do you recommend any particular third-party information sources that provide more reliable data on supply and pricing trends?

As a practitioner, I always loved what Purchasing Magazine offered.  Today, they offer a weekly email called Price & Supply Alert that delivers up-to-the-minute market information.  Non-competitive peers in other companies can also be a great resource.  Keeping up with the news is another important thing to do as news events (e.g., OPEC planning a production cut, port workers threatening a strike, the government contemplating tariff decisions, etc.) can translate into factors that impact the market.  Finally, good suppliers can offer deeper visibility into the supply chain.  When I was in the airline industry, I had a number of situations where supplier input helped us stay ahead of the curve and avoid constrained supply in critical situations.

SE: Finally, can you look into your crystal ball tell us what you see in terms of supply availability and pricing for near future?

The most difficult supply situations occur as the result of the somewhat unexpected:  natural disasters, terrorist strikes, and the like.  So pure knowledge of economics alone can’t predict every price spike or supply shortage or when it will happen, so I will not pretend to have supernatural forecasting capabilities.  However, you can observe the cyclical pattern of certain categories and get a feel for the direction a commodity market is going to go.  For example, we’ve seen oil prices decline over the past several months and seem to stabilize in recent weeks.  Looking over the history of oil prices, you can see a peak-decline-trough-increase-peak cycle.  So it is likely that, at some point, we’ll see an increase in oil prices and, later, the prices of categories that are driven by oil pricing before we see decreases.  The degree and timing of such changes will be determined by the occurrence or absence of those unexpected events I just described.

Thanks for the great insight, Charles. I too am a subscriber to Purchasing’s Price and Supply Alert. I also tap into supply market and commodity reports from leading sourcing consultants, like A.T. Kearney Procurement Solutions (more on this later).

With today’s volatile global supply markets, supply and commodity managers will need to be ever more watchful of changing market dynamics and adopt more flexible sourcing, demand management, and hedging practices. Balancing experienced insight with third-party supply market intelligence is fast becoming a prerequisite for navigating the global supply landscape.