South East Asia’s export was at $300Bn during 2013 and this was without including the major manufacturers like China, India and Japan. China’s global exports alone account to 28% of the overall export.
The question, yet unanswered, is, where are the companies sourcing the commodities for manufacturing? For example, 30-50 percent of a typical laptop is made of metal which in turn includes more than 20 different types of metals that are heavily traded. And the rest of the device is made from Silicon and Plastics. Plastic, that is being used for this manufacturing starts out as a byproduct of petroleum before undergoing heat-intensive processing and chemical treatment to be used as a part of the laptop.
These commodity prices have historically been among the most volatile. Measured volatility has not been below 15 percent and at times has been more than 50 percent. Often the volatility of commodity prices has exceeded that of exchange rates and interest rates. The large price variations are caused by disturbances in demand and supply. And therefore determining the commodity prices for manufacturing operations for the whole financial year has been challenges to organizations.
For example, Polyethylene which is used in computers, laptops and other accessories was traded at $347.67 per ton during March 2013 and the price for the same was $312.49 during August 2013. Imagine a manufacturing firm buying during March when they had an option to buy during the month of August. That would have been a huge cost saver for the manufacturer. All of this calls for a good forecasting using the historic data.
Most of the manufacturing organizations could have saved their money in procurement and the easiest way could have been saving it through purchasing these price volatile commodities. The challenge in here is companies purchase commodities for the whole financial year and therefore forecasting the price prior two quarters is the minimum requirement. But as there are volatile in nature forecasting has always been a challenge when it is done intuitively or by “guess work”.
The solution here lies in bringing all the historic data together and starting off the journey of forecasting these price volatile commodities. Data driven approach towards this problem has helped many manufacturing organizations in the past.
If we start looking at the data driven approach in methodological way then the first step would be to understand your commodity landscape and stay in know of the factors that affect prices. This is a compulsory as every commodity or organization is very different from the other. Let me talk about a case study where we worked with a sourcing analytics team of a fortune 500 pc and printing company. We identified the drivers of memory, HDD, resins and multiple metal prices. We also provided component intelligence on batteries, power supplies custom ACICs and PCBA’s. This process equipped the organization with the necessary information that they are supposed to know while they are purchasing their commodities.
Can we do something more? Yes, we worked with them on cost forecasting model using macro-economic data and also developed should-cost models for 80% of component portfolio. These data driven processes equipped them with a robust forecast accuracy which was ~25% higher than before and this resulted in a ~5% of annual cost savings through forward contracting.
I’m sure your manufacturing organization is also facing a similar challenge in sourcing and the answer to this question will always be – Data Driven Approach.
This article is also featured in Supply Chain Asia.
This blog is written by Alagiri Samy, Analytics Consultant at BRIDGEi2i. Alagiri is also a contributor for Supply Chain Asia and a former Editor in chief for MAARS india. He is recognized as one of the top 180 bloggers in the field of Big Data & Analytics by Data Science Central.
About BRIDGEi2i: BRIDGEi2i provides Business Analytics Solutions to enterprises globally, enabling them to achieve accelerated business impact harnessing the power of data. Our analytics services and technology solutions enable business managers to consume more meaningful information from big data, generate actionable insights from complex business problems and make data driven decisions across pan-enterprise processes to create sustainable business impact. To know more visit www.bridgei2i.com
The views and opinions expressed in this article are those of the author and do not necessarily reflect the official position or viewpoint of BRIDGEi2i.