Targeting Commodity Costs (Episode 26)

Mastering Circumstances

Instead of reacting to commodity prices, why not proactively manage them. The greatest impact comes from managing commodities in the product design before they are locked in.

Elaine JonesTargeting Commodity Costs

Elaine Jones shares how target cost techniques impact commodity price volatility.

Passing Commodity Cost to Customers

Alan StrattonAlan Stratton responds to a viewer’s desire to simply pass commodity price volatility to customers.

Click HERE to enter your own question.

In episode 26

Mastering Circumstances

Coming up on Performance Management Edge… Targeting Commodity Costs and Passing Commodity Cost to Customers.

I’m your host, Alan Stratton. This is the show that helps you get an edge in business. The edge you need to get things done, to soar above the masses, and to make more money.

How many times do you feel like the victim of circumstances in your business operations? Suppliers are billing you extra for commodities; Commodity costs dwarf expense budgets and destroy bottom lines. How can we make money in these environments?

Instead of being a victim of circumstances, this episode addresses ways to become proactive and take control while you still can take control. First, Elaine Jones will help us manage commodity costs. Later, a viewer just wants to pass commodity costs on to customers.

Back to becoming proactive, let’s hear first from Elaine Jones.

Elaine, over to you.

Elaine JonesTargeting Commodity Costs

Cost management is vital in today’s economic environment where margins are tight and competition is global. Even more challenging is predicting costs of products or services. This is a challenge for organizations operating in a business environment in which their costs are highly dependent on commodity prices and currency exchange rates. The more volatile the commodity, the more challenging the task of cost management.

Commodities are managed through hedging, futures and fixed price contracts. But during the product development phases, target costing is the best tool for addressing commodity price volatility.

Target costing is all about determining the end result at the beginning of product development and managing to the result throughout the design and implementation. Target costing won’t predict the commodity prices but the target costing process promotes early awareness of volatile commodities and regular monitoring of them.

Awareness of volatile commodities in early product development allows for material substitutions or change in manufacturing process to a less cost risky commodity. Making these changes after the production phase is very costly usually incurring additional capital expenditures as well.

Commodity prices cannot be known in advance. None of us have crystal balls. Over the past decade, commodity prices have become more volatile and have made cost management very difficult. During product development, target costing offers a process and tools to bring awareness early to commodity price volatility and allow for tradeoffs at a phase when they are low cost.

Thank you Elaine. Rather than just accepting the role of a commodity victim. Why not attack commodity volatility well in advance while you can still make good decisions.

Let us hear your opinions. Elaine and I would love to hear your experience and comments on both commodity management and target costing. What has worked for you? Scroll down the page at Performance Management Edge dot com and let us hear from you.

Now for today’s question.

Passing Commodity Cost to Customers

“Since commodity increases impact my competitors also, shouldn’t I just pass my commodity increase along to the consumer rather than trying to manage them?”

In response,

From one point of view, if you want to be just like your competitors, then all you have to do is to implement a commodity surcharge. Forget about managing commodities, just pass them thru. However, in this case you forfeit any competitive edge with your customers. Customers may be forced to accept a commodity surcharge, but they will not like it. They will be looking for alternatives to your product – other vendors, reducing consumption rates, or eliminating your product altogether.

So why not transform this problem into an advantage?

In the product design and development phase, use target cost techniques including the voice of your customer to first recognize the commodity risk. Then design the product and its production process to minimize usage and minimize waste up front. Do this before the design locks in and eliminates alternatives. One fringe benefit will be that your customer completely understands the commodity’s impact on the end result.

This will both save costs and distinguish you from your competitors. In addition, with the thorough knowledge gained early on, other functions inside your company also have opportunities to design effective hedging, futures and fixed price contracts long before you are forced to do so.

The name of the game is to distinguish yourself from your competitors. Why not start early so you can last longer.

Now to our viewers. Do you agree, or Not? How do you manage volatile commodities? What has worked for you? Please share below this video at Performance Management Edge dot com.

In addition to comments, we also appreciate your questions like this one. With your questions, we customize this show to your own issues. Keep the questions coming. Ask your question on the “Ask Us” tab at Performance Management Edge Dot.

In appreciation for his question, we’ll arrange a time for this viewer to have a telephone visit with one of our experts. And, we’ll send him a copy of “One Report” by Robert G. Eccles, and Michael P. Krzus.

Thank you to the Beyond Budgeting Round Table for furnishing this book.

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Remember: Business Management is more of an art than a science. Don’t wait for tomorrow to get started. Start today making these perspectives part of your business art.

On behalf our viewers, I thank our experts. We’ll see you all again on the next episode.

Meanwhile remember, Performance Pays Profits.

On behalf our viewers, I thank our experts. We’ll see you all again on the next episode.

Meanwhile remember, Performance Pays Profits.

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