Dynamic Commodity Management - Transaction management that matters

 The language and concepts of DCM for supply chain management

​Our leadership has been working with firms across all physical commodity sectors and we find a common issue of conflicting terminology. We are trying to create a common lexicon.
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Strategic sourcing practitioners talk about commodities and then categories. Our firm tries to reverse that noting that everything is a category but there are three types of commodities:
Tradeable Commodities - ​a physical commodity category for which there is a fungible contracting mechanism and usually an external market mechanism, such as a futures contract, that allows near real-time price changes; gasoline and corn are examples
Procurement Commodities - a physical commodity category for which contracting is under bespoke or company specific sourcing contracts and there is not an external market mechanism; car tires and office supplies are examples
Hybrid Commodities - a physical commodity category for which contracting is under bespoke or company specific sourcing contracts but there is an external market mechanism with more rapid price changes; certain resins can be an example of this category

We feel these distinctions are important because there nature of the market structure influences the management structure for a category. Strategic sourcing initiatives speak to cost reduction, clean sheet analysis and supplier consolidation. These work for procurement commodities but can be completely inappropriate for tradeable commodities. Tradeable commodity initiatives speak to risk control and predictability of earnings - concepts that may not have traction in strategic sourcing plans.

But we see a more critical consideration - both of these areas deal with the ability to understand how costs change, where costs arise in an organization and where the decision to take on, hold, transform or remove risks and costs arise in the organization. Look for cost drivers in a tradeable commodity using strategic sourcing lens may increase costs or, worse, hide them.

We bring the square pegs to strategic sourcing methodology - we recognize they may not be the biggest need or the central need. But we think knowing when and how to use round pegs and square pegs can fundamentally change a firm for the better.