PURCHASING CONSULTING VS RISK MANAGEMENT

This week’s Post is different from the usual ones that we publish in Magnus Commodities, and it comes to think about the type of management when it comes to the purchase of Commodities, vs. other buying families where there is no market setting their price.

SHOPPING, A NON STOP ACTIVITY

The job of a Purchasing Director is really difficult, they have to know about almost everything, given that companies manage numerous families categorized into large Groups: Direct and Indirect. It is not unreasonable to start on Monday with a process to negotiate the Sub Contracted people, immediately move on to Containers and close the week with Office Supplies, or Renting Cars… quite a challenge.

There are as many purchasing departments as companies, we have been working with hundreds of them in all our years of life at Magnus Commodities, and it is true that they all put 120% of their energy for an outstanding performance.

Gone are the years where Buyers focused their efforts on an Annual Negotiation, usually at the end of the year, with little relationship during the year with their suppliers. Procurement & Sourcing activities are now intertwined, where Technology is a “must” to have more and better information in real time and to establish a closer and more evolving relationship between the Company and its Suppliers.

The good work of the Purchasing Departments has made companies have greater knowledge of what is bought, and about the Market, being this increasingly global, although COVID has taught us the importance of Local Supply Chains, with problems of those companies that depend on other countries for their supply – Russia closed the Cereal Export at the beginning of the Pandemic, to ensure domestic supply, leaving many companies with serious supply problems.

Aspects such as Globalization, Digitization, New Services, Competition, or Innovation, , have caused purchasing professionals to rely on external specialists to continuously improve their operations, adopting everything that would make their companies more competitive. Buyers are among the professionals who have changed the most in the last decade, who in a humble way and with a tremendous desire to learn, have been adapting their way of working first to Globalization, then to Digitization and lastly to high Competition between companies in each sector, and for the need to always go a little further.

MAGNUS & PROCUREMENT

Magnus Commodities has a vast experience working with Buyers, so we know about the complexity of their work and great pressure they have from their organizations; Price is crucial when a company makes or loses money in each fiscal year, being something that does not end. Very good results achieved in 2020, makes the company to expect even better results in 2021, that’s the life of a buyer ..

As a result, Procurement departments look to External Experts who support them to achieve better results, where we can find 2 large Groups: 1) Technology Companies or 2) Purchasing Specialists. Within the second group we can find Strategists and Operational, the latter being those who work on the ground together with buyers to accomplish tangible results for the company. This teamwork implies the search for new suppliers, product redefinition, negotiation in search of new alternatives. Innovation processes, etc.

Our experience at Magnus Commodities has shown that when an operational consultant tries to improve Commodities, and does so under the cost objective, a serious mistake is made, perhaps not in the short term given the markets have been bearish since the last time hedges were made, but certainly in the medium and long term. Like many other things in life, bad decisions have their inertia, their effect is not seen at the moment, but when their impact arrives it is very difficult to correct, and if it is achieved, its influence will be in the medium term. Therefore, it is essential to make good decisions, not only in the short, but in the medium and long term.

The reality is that purchasing operational consultants, who often charge their fees based on cost reductions, do not usually understand that Raw Materials or Products whose price is set by a Market where no one has the power to change, should not be managed as if it were, for example, Office Supplies where a large part of the negotiating power resides with the buyer. The key to buying Raw Materials lies in Risk Management, to control the impact for the company of the Volatility of the underlying markets.

In different occasions Magnus Commodities has been approached by consultants trying to collaborate with us, under the premise of cost reduction, and up to date, we have never managed to have a Partner who understood the difference between Cost and Risk Management. At the end of 2020 Magnus Commodities has signed a Collaboration Agreement with the Company Eurofunding, and its purchasing consulting unit called “COST SOLUTIONS”. Finally, we have found a Partner that 1) has the Technology to digitalize the Purchasing Departments, 2) are experts in Operations to create a dynamic and Results-oriented Methodology, and 3) know that Energy must be treated looking at the Medium Term.

THE GREAT DILEMMA

If we look up a little and walk in the shoes of energy consumer companies, we find ourselves in a great Dilemma. Not only do companies worry a lot about the cost of Energy, but they ask themselves the big question: How should I relate to Energy in the Future 5 – 10 years from now?

When we talk about Energy, there is a trident made up of: a) Price, b) Energy Transition, and c) CSR, which should define the actions of a company in the coming years. In 2020 we met many of our clients, who asked themselves that question, the answer to which they could NOT answer, because there is NOT a universal one that fits all.

The truth is, the world of Energy raises Medium and Long Term opportunities, such as: Self-Consumption, PPAs, Direct Consumer, Generation, etc. that needs to be taken at the Top Management level, with broad consensus of the owners or shareholders in each case.

THE SOLUTION, THE MASTER PLAN

Facing this dilemma, Magnus Commodities’ proposal is the Definition and Execution of a MASTER PLAN, which defines the path of the next 5-10 years, guiding trough the different alternatives to an objective assessment, and their execution that is fully aligned with the final objectives, those related to Price, Energy Transition, and CSR.

With no doubt, in order to draw the Master Plan and its execution, a Partnership such as the one between Magnus Commodity and Eurofunding Cost Solutions, is the key.

Let’s talk!