Global sourcing has emerged as a pillar to firms that seek to maximize cost, diversification of suppliers as well as to explore new markets. The fluctuations of prices, however, are among the greatest problems of sourcing on international level. Unpredictable costs may lead to a great deal of influence on profit margins, contract planning, and efficiency of the supply chain. Knowing the proper way of measuring the price volatility can assist companies in reducing risks and make more rational decisions regarding sourcing.
This blog discusses the practical ways of measuring price volatility in global sourcing, and it enables you to operate this complexity with confidence.
What Is Price Volatility in Global Sourcing?
Price volatility is the extent of purposeful change in price of services, materials or goods within a specific time. The prices in the case of sourcing internationally may be affected by the many factors such as currency exchange rates, shortages of raw materials, trade tariffs, geopolitical tensions, and even local economic changes. This volatility can upset the budgeting and forecasting process; hence it is important to learn and quantify this volatility.
Why Measuring Price Volatility Matters
Buyers can pay too much or can be taken by surprise by an increase in costs without gauging the variation in prices and lose profits or develop poor relationships with their suppliers. Additionally, regular knowledge on price volatility makes it possible to control risks, negotiate contracts more effectively, and make decisions on how and when to source.
In case of a region as differentiated as Europe and Asia, say, being aware of whether sourcing will be cheaper in France, Poland, Turkey, or Thailand will provide a more stable price will be a strategic benefit.
The ways of measuring price volatility.
One of the most common methods to measure price volatility mathematically and using a concept of standard deviation is popular. The statistic is used to indicate how dispersed the prices are on either side of the average price, over a duration of time.
To compute standard deviation, you need to gather price data points in the sourced products in weeks, months or quarters. Then, calculate average price, and determine the deviation of observed price from that average. The greater the standard deviation, the more the price is volatile. With this information businesses can make decisions as to whether a supplier or source country is reliable enough to trust it or whether they have to hedge against that volatility.
For example think of situation where you calculate standard deviation of the prices of the raw materials imported in Thailand are low as compared to those of the prices in Turkey where the prices are highly volatile and therefore you may not be inclined to Turkey as much as you are inclined to sourcing in Thailand when it comes to the planning of costs that are more stable.
Tracking Price Trends with Moving Averages
Other than standard deviation, it will be beneficial to track moving averages of pricing data, which will help to level the noise of day-to-day fluctuations and bring out underlying trends. To give an example, a 30-day moving average price can indicate that the costs are always increasing or decreasing, which can also help to predict the better times to buy.
Using Price Indices and Historical Data
Price indices in the industry and past history prices are helpful in benchmarking. The indices have been released by many industries to monitor the prices of commodities and manufacturing expenses in various nations. A comparison of such indices of such countries as Poland and France could help to see which sourcing markets are more stable at the moment or less stable and vulnerable to inflationary forces.
Technology and Tools to Monitor Volatility
The volatility measurement in the modern digital world can be automated with software platforms and data analytics tools. These tools are used to gather the global market prices, exchange rates, and logistics costs in real-time and display dashboards that indicate unexpected changes. The inclusion of this technology in procurement practices minimizes manual errors and makes sourcing strategies proactive.
Factors That Influence Price Volatility by Region
It is important to consider the regional differences. As an example, sourcing in France can be influenced due to European Union trade policies and labor expenses that will result in constant but more or less predictable cost. Conversely, sourcing in Poland may be more cost efficient but it can also be subject to fluctuating energy prices that affect the cost of production.
Likewise, Sourcing in Turkey and Thailand have their own volatility characteristics. As a country that lies between Europe and Asia, this exposes Turkey to geopolitical and currency fluctuations, whereas sourcing in Thailand market is vulnerable to fluctuations in the export of raw materials and political stability.
Knowledge of these dynamics assists in placing measured volatility in perspective and making real expectations.
Prices Volatility Management and Mitigation tips
The understanding of the method of determining volatility is only the first step. The following are some of the thoughts that can be used to deal with it:
- Formulate multi source policies to prevent reliance on one volatile market.
- Use Contracts, price adjustment on transparent index.
- Use currency hedging when a layer of price uncertainty is created by the exchange rates.
- Build flexibility into inventory and order planning must be created to schedule purchases at good prices.
- Maintain close relationship with suppliers to receive early notices on price changes.
Final Thoughts
Price volatility is a critical measurement tool in sourcing internationally since companies require cost management and enhanced supply chain resiliency. This way, you develop a more transparent and tactical approach to procurement through standard deviation, price trend monitoring, and price driver analysis for different regions which is visible in sourcing from France, Poland, Turkey, or Thailand.
