Regardless of how many chevrons (steps) your organization has in its Sourcing/Supply Chain processes, can it adequately address the types of issues surfaced by the recent NY Times article which highlights how aluminum prices are artificially inflated globally? This is not a political piece or even a bashing of the firms involved. Rather, it is meant as a discussion of our community’s capabilities to address these issues. The gist of the story is that a financial company bought up an aluminum storage and warehouse facility and then essentially controlled the market by stockpiling and increasing the delivery lead time (6 weeks to 16) – many times by just shuffling aluminum between their own warehouses endlessly. Additionally, since the price of aluminum is set by the London Metal Exchange (“LME”) (said financial firm is part of the ownership) by factoring in the delivery lead time, the global price of aluminum has also been artificially increased. The impact you ask? Look around and spot the aluminum in your daily life!! Over $5 billion just for American consumers in the last 3 years.
So even though Coca Cola stopped buying aluminum through that distribution channel, it was still paying the premium built into the global prices. Nick Madden, the Chief Procurement Officer for one of the nation’s largest aluminum purchasers, Novelis, who has tolerated not only delays and high premiums but also an increase in Supply Chain risk, thinks the LME is still a long way from solving the problem. It finally took a consortium of beer brewers to challenge the LME and get the ball rolling to start addressing this issue. The financial company has just agreed to a record fine (almost half a billion dollars – with a B).
Before you get complacent because you don’t use aluminum in your industry – a similar, not the same, situation exists in many, many other commodities – oil, wheat, cotton, coffee and more. A similar scenario is about to occur in copper with financial service firms almost ready to control 80% of the market. Global prices and supply of gold and diamonds is no different. By the way, the same financial firm estimates that a 1/3 of the price of a barrel of oil is pure speculation. A 1/3!!! You may also recall the recent revelations about LIBOR rate setting and there should be no debate on the impact of that to the entire global economy.
Yet, where do most organizations focus their Sourcing/Supply Chain processes and energy? Their supply base. Let’s take the example of aluminum. What results would your organization have achieved in managing your costs and lead times by pressuring your direct suppliers when in fact, most of the impact of those two issues were already baked in before the aluminum even entered the supply chain? Would your organization have even been able to uncover these issues? Do you actually go back far enough in your supply chain to understand how commodity prices are set or do you fight the speculation premium by squeezing your suppliers? Is there any collaboration between competitors in your industry to understand these types of issues and challenge them (the beer brewer’s consortium)? What about collaboration in the supply chain from the raw commodity producer to you? Are you able to identify and drive out the speculation premium? We can continue to chase best practices and start becoming better than our competitors at squeezing more out of our suppliers in a zero sum game. Or, we can adopt Next Practices and make sure we identify the right issues at the right sources and tackle them with a different set of practices that may mean collaborating sometimes instead of competing all the time?