Protecting Yourself Against Raw Material Price Fluctuations

Read Time: 4-minutes

I’ve long loved a Hotel Chocolat hot chocolate from the velvitiser, even receiving a monthly top-up of salted caramel sachets at the height of my addiction enjoyment.

This week, an email went round from them as they have been forced to push prices up due to “cocoa now costing 70% more than it did a year ago.”

It got me thinking, how can companies protect themselves from things like this?

Now, I’m not saying the buying team at Hotel Chocolat didn’t implement any of these things, or that they’ve made any mistakes with their purchasing. I don’t know.

But as buyers of chemical raw materials and ingredients, sudden price increases can significantly impact costs and profit margins. Understanding how to safeguard your business against these fluctuations is crucial for maintaining stability and profitability.

Many companies fail to prepare for price increases because they lack a strategic approach, rely too heavily on a single supplier, or do not monitor market trends closely enough.

So, today I’l talk about:

1. Diversifying Supplier Base

2. Long-Term Contracts

3. Monitoring Market Trends

4. Utilise Inventory Management

5. Applying the CLEAN Framework

"Expect the best, plan for the worst, and prepare to be surprised." – Denis Waitley

Diversifying Supplier Base

Something I have spoken about at length, and something really obvious, but many still don’t implement it. Having multiple suppliers can reduce your risk of price hikes. Spreading your purchases across different sources, you can mitigate the impact of one supplier raising prices.

Idnetify new suppliers, evaluate them thoroughly, and then develop relationships.

Long-Term Contracts

Long-term contracts with suppliers can lock in prices for extended periods, providing cost stability. This can be especially beneficial in times of market volatility. By negotiating with the future in mind and creating joint business plans, you can align your goals with those of your suppliers for mutual growth.

I talked about how to build strategic relationships with suppliers in a previous blog post.

Monitor Market Trends

The truth is, Hotel Chocolat wouldn’t have avoided the cocoa price increases just by having more supplier options. But having really transparent, open, and collaborative relationships with suppliers, means you can delay it, forsee it, and prepare for it, well in advance.

It then gives you the opportunity to stagger price increases, prime customers for increases, bring in additional stock, work with the supplier to stagger increases etc.

Utilise Inventory Management

The above leads in nicely to inventory management, taking more strategic positions on raw materials and ingredients. However, it’s impossible to really implement unless you have real-time, reliable market intelligence.

Applying the CLEAN Framework

If you were to apply the CLEAN Framework in this case (which I actually have for Cocoa recently), it would look something like this:

1. Clarify (…your needs): volumes, quality, packaging, sustainability etc. This clarity helps in making informed decisions throughout.

2. Locate (…potential partners): scout for potential suppliers who meet your needs, send an RFI. Compare their quality, prices, market trends, and reliability on a real high level and start shortlisting. Remember, the minimum is always an East, West, and Local source as a minimum.

3. Evaluate (…the options): based on what’s been identified as key from the clarify stage, start to do some more in-depth analysis of the potential options, and further cut down the options.

4. Agree (…commercial terms): start then negotiating with the shortlisted suppliers, but build in more than just a cost per kg. Think more strategically, information sharing, safety stock, consignment stocks so on and so on, but make sure it’s beneficial for all parties.

5. Nurture (…the relationships): build long-term sustainable partnerships with your suppliers, through great communication. Share information freely, and be proactive with getting hold of information from the other side. Regular feedback, site visits, and joint initiatives can strengthen these relationships and ensure mutual success.

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So, there you have it. By understanding and addressing the Innovation Gap, you can ensure your business stays competitive and informed.

Embrace transparency and make strategic decisions based on the latest market trends to stay ahead in the chemical industry.

Take proactive steps to enhance your supply chain visibility and build strong industry connections.

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Thanks for reading, and see you next week.

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Whenever you’re ready, there are 3 ways I can help you:

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