High default risks for raw materials

Global crises are relentlessly exposing the weaknesses in many supply chains. This also affects basic raw materials and energy sources, which are often difficult to obtain, and then only at very high prices. Energy-intensive sectors such as the chemical and metal industries, the textile and food industries, and the glass and paper industries are being hit particularly hard. Although costs have continued to fall significantly in many areas, we must learn from the recent past and make supply chains as resilient as possible. You only need look at changes in the crude oil price, which has been fluctuating wildly in response to geopolitical conditions for decades. The same applies to resources which are currently in great demand for the production of high-tech components in mobile devices, electric car batteries or pharmaceuticals. The most recent commodity list produced by the German Mineral Resources Agency, for example, shows the risks involved in sourcing 305 mineral resources. For 140 of these (46%), there is an increased procurement risk due to the stability of the countries of origin and the concentration of supply.
This results in a dilemma for raw material purchasing: On the one hand, reducing dependence on foreign suppliers means sourcing closer to home: in this case, from Europe. On the other hand, raw materials in Europe are comparatively expensive. In addition, the requirements of the European Supply Chain Act and various ESG criteria must be taken into account.

The biggest dangers in raw material purchasing

The supply of raw materials is currently vulnerable in several ways. According to SAP Insights, the following ten risks are particularly significant:

  • International political unrest
  • Inflation
  • Climate-related disruptions
  • Violations of ESG regulations
  • Cyber attacks
  • Supply bottlenecks
  • Logistical problems
  • Fluctuations in demand
  • Lack of transparency
  • Unreliable business data

These factors – individually or in combination – increase the risk of business interruptions. Some lean manufacturing practices, such as those based on the just-in-time principle, are particularly vulnerable. As a general rule: the more links a supply chain has, the more likely it is to be interrupted.

Common consequences of supply chain interruption, or SCI, are:

  • Decline in quality and production
  • Decrease in sales
  • Damage to corporate image
  • Cost increases

In light of this, it might be worth realigning supplier management to prepare for current and future distortions on the raw material markets. One commonly used strategy for hedging risks is to conclude long-term supply contracts at fixed prices. Although this means you would not benefit in the event that costs fall, it also protects against inflation and increases security of supply -  a highly significant factor in customer loyalty. 
However, small and medium-sized enterprises (SMEs) are at a disadvantage in such negotiations because of their comparatively low turnover. Normally, their only option is economic use of resources: they have limited scope for price increases, as they have to pass these on to their customers.

Strategic approaches to secure supply chains

Disruptions and changing patterns of demand increase the pressure on managers to act. They have the difficult task of ensuring continuity of supply, reducing costs, meeting customer demand and supporting business growth. To carry out these tasks effectively, and to reduce cost and supply chain risks in raw material procurement, companies need a transparent overview of their own situation and that of the market. In the long term, failure to acknowledge the dangers in its supply chain can result in a company losing out to the competition - and can pose a consequent risk to its survival. 
The core component in raw material purchasing has to be a digital supply chain management process, capable of reacting flexibly to market conditions. There are a number of important questions that need to be clarified before this is implemented:

  • How high a price/volume risk can the company afford?
  • How important is price certainty for the planned delivery month?
  • What is the optimal contract duration for the supply contract?
  • Are there tools available which can react to price changes in an agile manner?
  • Are there alternative sources of supply for production-critical raw materials?
  • Is a digital system for fast transactions already in place, and if so can this be integrated into new IT structures?

Companies need answers to these and similar questions so they can achieve the most complete and consistent overview possible of their entire supply chain ecosystem. Essentially, this covers transparency in terms of production, inventory, warehouse management and logistics, as well as sales and field service. The goal is to create traceable end-to-end procurement and supply chain processes, including suppliers, logistics service providers and trading partners.

How software tools can help

One solution is enterprise resource planning (ERP) software. Its primary purpose is to connect multiple departments within an organisation through data sharing and managing information. However, it can lack the agility and flexibility to meet the challenges of dynamic business environments.

An alternative approach can be a (cloud-based) supply chain tool. In addition to fully integrating all functions on a single platform, it helps companies prepare for, and respond to, rapidly changing market dynamics by providing end-to-end visibility and complete control across the entire supply chain. An optimally integrated system offers the following advantages:

  • Scalable and high-performance architecture
  • Flexible workflow capabilities
  • Prevention of redundancy in processes
  • Classification of article and supplier master data
  • An intuitive and configurable user interface
  • Holistic decision-making across the entire supply chain