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By: IBISWorld Staff Writer, Taleiah Todd-Hill
In the face of a changing regulatory landscape and fluctuating commodity costs, buyers face a range of market environments where they lack the upper hand. However, by entering negotiations armed with market knowledge and an understanding of the characteristics that work against them, buyers can increase their leverage.
Using our Procurement Data Wizard tool, IBISWorld has analyzed a range of markets with characteristics that often work against buyers, including volatile prices, high market share concentration and changing regulations. Procurement and supply chain professionals can use the strategies and tactics provided to help increase their spend efficiency and encourage competitive RFPs with suppliers.
Using Long-Term Contracts to Combat Volatile Prices
Price volatility is the primary market risk factor that directly impacts a buyer’s ability to anticipate how much a product or service will cost. However, even though volatile prices can mean a lot of ups and downs in costs that can work against purchasers, that doesn’t mean all is lost.
Take fuel prices, for example. Prices for fuel have been all over the map during the past three years as oil prices have fluctuated with a supply glut and slow growth in demand. Gasoline prices have plummeted at an estimated average of 14.4% per year during the past three years, in line with the falling price of crude oil, which is a key input needed to produce gasoline. While buyers have benefited overall from this massive decline, gasoline prices are forecast to rise at an average annual rate of 4.2% during the three years to 2020 as the price of crude oil bounces back. To combat these price changes, buyers with large gasoline procurement needs, such as rental vehicle companies and trucking companies, should consider a long-term contract in the very near future. These contracts typically include price ceilings and floors to keep buyers’ costs within a predictable range during the life of the contract. Smaller buyers can take advantage of the market’s vast number of midsize and small suppliers to negotiate better terms. The resulting high price competition among these suppliers means they’re more likely to negotiate with potential customers.
The price of natural gas has followed a similar trend, having fallen at an estimated annualized rate of 11.7% during the past three years due to excess supply. However, demand for natural gas is expected to pick up as electricity consumption rises among businesses with operations that run on natural gas as an energy source. With natural gas prices forecast to rise at annualized rate of 2.3% in the next three years, buyers should lock in contracts as soon as possible. Because prices will continue to be volatile as supply and demand trends fluctuate in the coming years, buyers should ensure their contracts include price ceilings or other restrictions on how much and when suppliers can raise prices to keep costs manageable.