Is the Commodity Era Over?
By Barry Parkin
I’ve recently begun to wonder if we’re moving away from the world of commodities as we’ve known them for hundreds of years. The buying, selling, trading and hedging of commodities like cocoa, grains and energy have been stalwarts of global trade. For decades, people in corporate procurement have sourced raw materials from around the world based on defined specifications and quality standards. We didn’t focus much attention, if any, on where these materials came from or under what conditions they were produced. Today that is changing and fast. More and more companies are working to align procurement with the environmental and social parameters that allow for sustainable growth. This alignment is leading many businesses to think differently about what, where and how we buy.
At Mars, we’ve been vocal about our belief that supply chains, the engines of global growth, are broken. To fix them, business needs to push boundaries and extend ambitions to the farthest reaches of our impact. We need to move beyond commodities that are bought and sold in markets where the lowest cost is the largest business driver. Instead, we must shift to long-term models for corporate buying that are anchored on building mutuality, reliability, resilience and risk management into the core of our buying patterns.
Here are five indicators that the commodity era as we’ve known it is over:
Instead of looking at commodities as one-time and immediate purchases, leaders are embracing long-term investments. At Mars, this is exactly how we approach our renewable energy strategy. While many companies prioritize short-term electricity contracts, we are establishing long-term, country-level contracts in places like Mexico, the United Kingdom and the United States. We are saving money versus fossil fuels by lowering the risk to the developers and this is what creates a win for the planet, for the developers and for our business. Electricity is no longer a commodity, but a long-term investment within which business is a market maker not simply a price taker.
Supply chain visibility is a key step in addressing the systemic environmental and human rights challenges facing industry. We are now in a transparency race, if you don’t know what you’re buying, where it comes from and under what social, economic and environmental conditions it’s being produced, it’s almost guaranteed to lead to public scrutiny. Twelve of the biggest consumer goods companies are now disclosing exactly where we source our palm oil. If you look at our lists, you’ll find over 1,600 mills! Every one of them potentially has social and environmental risks associated with it. So, while we are racing to embrace transparency, we also must accept that it’s time to radically simplify our supply chains and commit to buying from known and verified suppliers. Another indicator that procurement, as we know it, is changing.
Once we know what we source and from where, it’s important for business to identify and fix the weakest links in supply chains to ensure long-term success. For companies that are largely dependent on agriculture, the weakest link is the millions of smallholder farmers that are currently living in extreme poverty across the globe. By working collaboratively on initiatives like the Livelihoods Fund for Family Farming and the Farmer Income Lab, Mars is seeking to identify the barriers to decent farmer income while also isolating and seeking to scale the interventions that work. When suppliers are able to source raw materials like mint, cocoa and rice in a way that lowers climate risk and increases opportunities for people to thrive, we lower our risk, while reducing our impact on natural resources and supporting the next generation of smallholder farmers. These kinds of sourcing practices require investment and they take time which means we are effectively committing to these growers for the long term. Yet another movement away from the traditional commodity approach.
Addressing climate change requires action across supply chains – especially since supply chains can be responsible for many times the greenhouse gas emissions of a company’s direct operations. At Mars, for example, we have a carbon footprint that is roughly the size of a small country like Panama. Less than 10 percent of that footprint comes from our direct operations. The rest of our carbon footprint is embedded in what we source where it exists as an unaccounted cost. If you assume a carbon price is on the horizon, which I do, you must begin to factor a price on carbon in to everything you buy. Suppliers with lower carbon footprints will be the winners in this new marketplace. With this in mind, we see materials being defined by physical, environmental and social attributes; therefore not as commodities.
But if this shift is necessary, how can it be done without adding additional costs and destroying our business models? We have found that if you focus on all parties in the supply chain doing well, or mutuality, then the costs can actually drop. By moving some of our rice sourcing to Pakistan, we were able to save 30% in the switch to a lower cost country, re-invest half of this back in on the ground activities that resulted in boosting farmer incomes by 30%, while improving quality and reducing water use by 30%. Another win-win-win.
Simply put, its good business to think beyond commodities and invest in supply chains that will help business become stronger and more resilient in the future. Every business has an opportunity to rethink our buying power by focusing on what and where we source, fixing our weakest links, factoring real costs into our pricing, and working collaboratively to advance long-term change.
This all points to the end of an era.
Barry Parkin is Chief Procurement and Sustainability Officer, Mars
Click here to continue reading on Triple Pundit.