Although the jury is still out as to whether or not the recession has ended, recent raw material price increases seem to indicate that commodity markets have indeed hit bottom and started heading back up. Naturally, that’s leading to category/commodity managers asking (or being asked) a few questions, including…

“Are we too late to take advantage of the buyer’s market?” And, “What strategy should we use right now to contain commodity price inflation?”

The important thing to remember about pricing is that it is always relative. Prices are still down overall when compared to 2008, and commodity markets still have a ways to go before they can recoup their losses from earlier this year. So, if you didn’t lock in direct material contracts already, there’s still hope. Sure you may have missed the bottom, but current prices are certainly better than what you’ll likely get 6-12 months down the road.

We are forecasting that most raw material markets will continue to see gradual price inflation until the end of 2009 and into 2010. So we continue to advise buyers to lock in direct material contracts. If buyers are holding off on price negotiations with suppliers thinking that raw material prices are going to suddenly resume their downward trend, we firmly believe they are rolling the dice and taking a fairly big risk. While waiting for prices to drop again, buyers may also be taking a hit by buying in the spot market while prices continue to increase. Negotiate your contracts now while demand is still lackluster and prices are still relatively low in historic terms.

Also, try to push for full pricing visibility if possible so you understand the cost drivers in the commodity you are buying. If prices continue to escalate, suppliers will quickly come back to you and request adjustments - you need to be armed with market information and understand your supplier’s cost structure so you can protect your company’s interests in future negotiations. One additional thing to keep in mind - labor markets will lag in the broader recovery, so there is still time to drive significant savings on your indirect/services contracts. You might have partially missed the boat if you didn’t act in direct materials, but you can make up for it by driving savings elsewhere.

Pat Furey is a Senior Category Manager in Ariba’s Global Sourcing Organization. Pat leads the team of global category managers covering direct materials and indirect goods and services.