INVERTO: How Supply Chains can Tackle Rising Commodity Costs

Managing raw material costs is becoming a crucial task for procurement teams as commodity prices are projected to rise.

According to a report by supply chain consultancy INVERTO, part of Boston Consulting Group, 65% of companies expect commodity prices to increase in the coming months, up from 48% last year. Conversely, only 13% anticipate price declines, compared to 41% in the previous year.

This price volatility is already hitting businesses, with 38% of respondents stating that raw material costs significantly affect their bottom line. Despite this, many procurement teams fail to give raw materials management the attention it requires.

The study, which surveyed nearly 200 senior procurement and management decision-makers from sectors such as manufacturing, engineering, chemicals, services and retail, highlights a clear gap.

Most participating companies, primarily from France, German-speaking regions, Spain and the UK, reported procurement budgets exceeding €100m (US$105m).

Conducted between March and June 2024, the study provides a snapshot of businesses grappling with an increasingly unpredictable supply chain environment.

The drivers of raw material price volatility

The rising cost of raw materials stems from several external factors disrupting global supply chains.

Geopolitical issues, including crises like the Red Sea conflict, were cited by 40% of businesses as reasons for shifting their supply sources. This turmoil affects access to critical materials like graphite, gallium and germanium, essential for industries ranging from electronics to manufacturing.

An economic downturn has further complicated matters, dampening demand for certain commodities in some markets while tightening supply chains in others. Adding to the challenge are new tariffs and regulatory barriers that increase the cost of importing key raw materials.

To counteract these disruptions, companies are adopting strategies to increase flexibility and resilience in their sourcing approaches.

INVERTO’s research reveals key measures businesses are taking:

• Dual and multiple sourcing: More than half (51%) of companies diversify suppliers to ensure steady access to materials.
• Nearshoring: By shortening supply chains, 39% aim to reduce reliance on far-flung markets.
• Friendshoring: Establishing supply chains in politically aligned regions helps safeguard operations, with 26% implementing this approach.

These strategies demonstrate a shift towards more adaptable procurement practices to withstand the pressures of volatile material costs.

Empowering procurement teams for the future

Despite the critical role procurement plays, Lina Tilley, Principal at INVERTO, believes many teams lack the tools, training, and authority to tackle raw material cost management effectively.

“Raw material price volatility creates an opportunity for procurement teams to make a significant impact, but this isn’t happening as often as it should,” Lina explains.

She notes that procurement teams typically purchase components rather than commodities directly, leading to a lack of visibility over raw material costs embedded within those components.

Tilley emphasises the importance of upskilling procurement professionals and equipping them with digital solutions to navigate this complex environment. These tools, including generative AI (Gen AI), can automate market monitoring, making it easier to identify potential price spikes and take swift action.

“Companies can achieve significant cost savings by gaining a comprehensive understanding of their supply chains,” adds Lina. 

However, investment in high-quality data, system integration and employee training is essential for these technologies to deliver meaningful results.

Beyond digital tools, Lina highlights the value of involving procurement teams early in product development. This proactive approach ensures raw material considerations, such as price stability and supply security, are factored into product design.

As supply chain dynamics continue to evolve, procurement teams must be empowered to add strategic value. Through better training, enhanced tools, and closer collaboration across business functions, these teams can help companies mitigate risks and seize opportunities in the face of rising material costs.

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