Understanding the Current Business Landscape
In recent discussions, we’ve highlighted that uncertainty is a constant in many areas, particularly in the business world. This uncertainty stems from natural disasters, wars, political events, speculation, and resource scarcity caused by natural events or human decisions.
The Impact of Volatility on Resource Prices
Greater uncertainty often leads to higher volatility in the prices of necessary resources for business operations. Scarcity and abundance can both contribute to price volatility. This volatility makes it more challenging for businesses to plan stable economic development.
The Role of Supply and Demand in Speculative Markets
Scarcity and abundance are key factors in creating conditions for speculative markets of raw materials, inputs, or services that businesses use to create goods or services.
Defining Production and Sales Costs
When we discuss costs, we’re referring to production and sales costs. Using absorption costing, these costs are defined by the sum of raw material acquisition costs, inputs, labor costs involved in production, and indirect allocable costs like energy, water, equipment and installation depreciation, and supervision and other service costs necessary for manufacturing the product or service a company offers.
Volatile Cost Components
Among the cost elements mentioned, raw materials and inputs are most susceptible to price volatility, sometimes accounting for up to 90% of production costs, depending on the industry and market availability.
Corporate Responsibility in Times of Uncertainty
Business management has the obligation to safeguard production activity during periods of high uncertainty and volatility. To achieve this, they should implement actions ensuring operational continuity and planning.
Continuous Market Monitoring
Businesses should maintain constant vigilance over relevant markets for raw materials, inputs, and offered products to implement timely preventive actions.
Secure Supply Chains
Management must ensure the supply of necessary raw materials, inputs, and services through solid and reliable relationships with suppliers. This includes diversifying suppliers and sources, preventing contingencies, and securing alternative supply options. Long-term supply contracts should be pursued for naturally scarce materials or those dependent on few suppliers. Anticipatory purchases of scarce or predictable products are also advisable.
Optimal Inventory Levels
Inventory levels for raw materials, inputs, and finished goods should be optimized according to market conditions, avoiding insufficient inventories during scarcity that could prevent offering products or excessive inventories during abundance causing losses due to price drops.
Price Hedging
Finally, price stability for raw materials and inputs should be ensured through timely procurement of hedging instruments against price and currency fluctuations. Maintaining a balanced portfolio of assets and liabilities (both in terms of currency and prices) can provide internal protection against abrupt price or currency shifts.
Key Questions and Answers
- What is the main challenge businesses face in times of uncertainty? The primary challenge is managing cost volatility, especially for raw materials and inputs which can significantly impact production costs.
- How can businesses protect their operations during uncertain times? By maintaining continuous market monitoring, securing reliable supply chains, optimizing inventory levels, and hedging against price and currency fluctuations.
- What are raw materials and inputs? Raw materials are the basic substances or components a company uses in its production process, while inputs refer to anything necessary for the creation of a product or service.
- Why are raw materials and inputs particularly volatile? Their prices can fluctuate due to scarcity, abundance, natural disasters, political events, or human decisions affecting supply and demand.
- What is absorption costing? Absorption costing is an inventory valuation method that includes all costs associated with manufacturing a product, such as direct materials, direct labor, and both variable and fixed manufacturing overhead.
