How to develop new ways to monitor market volatility – Supply Management

Risk has always been a priority for procurement and supply chain professionals, so it is somewhat surprising that prolonged market volatility has forced a new way of operating, to stop striving for steadiness and focus on preparedness instead.

Covid, high inflation and geopolitics are just some of the layered issues causing instability in supply chains, with implications for careers in the profession. And while this won’t impact all roles to the same extent, particularly those in the early stages of their career will benefit from attuning themselves to the factors driving volatility.

“There is a growing expectation from employers that candidates who have a wider knowledge and interest in geopolitics and in markets, as well as possessing good technical skills, are more desirable,” says Jonathan Weller, business director for procurement, supply chain & logistics at recruitment firm Michael Page. “Those that have an appreciation of how volatility is changing the environment they operate in are likely to be the kind of people that procurement and supply chain functions will be most interested in,” he adds.

This may be expressed more strongly in small and medium size enterprises (SMEs), where sharp prices and sudden changes can be hugely detrimental, therefore having a keen eye for global news and analysis may be necessary at that level.

“If you are in the UK and are undertaking a construction project, don’t be surprised that there’s inflationary pressures on imports because of the massive growth of construction projects in the Middle East,” says Stephen Ashcroft, director of procurement advisory firm Reskind. “That kind of approach would enable junior buyers to take action, such as assessing which suppliers are critical to the performance of their organisation, so that they can develop strong relationships with them, in order to address price volatility,” he says.

Track world news to spot issues

So how can young professionals gain a deeper understanding of the threads that can result in market volatility? At the most basic level, they need to follow what’s happening in the global news agenda, track commodities markets and understand other dynamics that can contribute to volatility, says Scott Dance, customer engagement director specialising in procurement, logistics and supply chain at headhunter Hays. He says developing an inquisitive mindset into the various developing trends that may eventually reach their own field is a valuable investment of their time and energy.

“It’s about having an understanding of what impact these issues could have, because that ultimately affects their core job, whatever they’re doing, whatever company they work for, whatever type of sector they work in,” Hays adds.

Dance says the need for a broader outlook among risk specialists has also arisen as the demands and expectations of the job have evolved. Firms hiring new staff are looking at candidates’ understanding of the wider world “because it is no longer a case of coming in, doing your nine-to-five, sourcing some new suppliers or getting a contractor on board and carrying out your nine-to-five without acknowledging the greater context,” he points out.

Now, contracts are being negotiated in a world where every part of the supply chain is likely to be managing risks from growing market volatility. “In that respect, are you making sure suppliers are properly audited in terms of their risk profile?,” says Dance.

Few industries have had to target market volatility more directly than the airline sector, where geopolitical situations, such as the Ukraine war, have forced up fuel costs, on the back of Covid, which temporarily stopped flying altogether, and with climate change fears looming in its future.

James Westgarth, who leads all procurement and supply chain management activities across Air Arabia, says we should be more prepared as these black swan events have been occurring continually over the past 25 years, and that today, following world news is more an asset than entertainment.

“I would say that volatility is inherent to our industry, and in terms of how we shape and train our procurement professionals and how to manage that,” says Westgarth. “When I’m hiring buyers, category managers or supply chain managers, I’m always interested to know what their general knowledge is about current affairs, about world events, about what the oil price is doing. You need to know what insights they are likely to draw from factors such as rising energy prices or inflation. 

Interpreting causes of volatility

From a leader’s perspective, Westgarth says the starting point for managing volatility is developing a strategic outlook that ensures you are on the front foot in a world of uncertainty. “The more strategically you can think, the more proactive you are, because over the long term you can start to develop contingency scenarios.

For example, you can start to think what would be the impact for us if global inflation goes into double digits or falls significantly. If you’re able to think like that, you can develop risk mitigation approaches such as reducing dependencies in our supply chain in a particular area,” he says.

Westgarth believes an important consideration when assessing the impact of volatility is what he describes as ‘elasticity of risk’ – what it means to suppliers in a given category. “We need to ask: are the suppliers protected from or massively exposed to inflationary pressures?,” he says. “In that case, we might frame the clauses in a contract.If we foresee there’s going to be huge demand for a given raw material, then you might want to something like a preferred customer clause put into a contract, whereby the supplier becomes legally or contractually obliged to supply you ahead of everybody else. It’s creating what I call the decision architecture to enable my team to mitigate their risks.”

With that in mind, it’s crucial that a leader is able to both identify potential issues and also communicate this to their team. This is imperative, according to Dance, who says senior procurement and supply chain managers are better placed to understand the specifics of drivers of market volatility and the potential effects, and so must explain these cohesively to team members.

“Individuals working within the sector will have varying degrees of understanding when it comes to the political and economic landscape and the ripple effects of high inflation, for example, depending on the level of their role, their life experience and their interest in the global news agenda. However, the importance of having an awareness of what is happening in the world at large, and the impact this might have on the market, should not be underestimated,” he says.

It’s also important to communicate risk management strategies to the wider organisation, to spread awareness of what the effects of volatility are, and how this is being managed. “I tend to highlight how procurement can help in terms of identifying volatility in the supply chain, and mitigating that risk,” says Westgarth.

“With Covid very fresh in their minds, the C-suite realises that if you don’t have the means to identify volatility, you’re putting the whole company at risk. My vision is to take procurement from the basement to the boardroom by highlighting the value of risk mitigation in supply chain management as being part of the DNA of procurement.

“You need to have a kind of absorbency in the organisation to be flexible enough, to change quickly enough.” The new risk-focused tools are supporting this move, Westgarth believes.

Understanding rapid changes in the demand for and supply of sustainable aviation fuel is key to operating in Europe, where failure to build stocks can result in substantial levies. “As fuel consumption makes up somewhere between 40-50% of a cost base of an airline, you can see the impact that has,” Westgarth says.

Tools developed to help organisations predict and react to volatility, for instance identifying sudden and rapid changes in available volumes of sustainable aviation fuel, are growing in sophistication. However, even those that enable you to go deep into the supply chain, perhaps to tier three or even tier four suppliers, will still need astute analysis skills, says Westgarth.

Human skills are indispensable when it comes to acting on supply data, he says. “It still boils down to how well you interpret the information available,” says Westgarth.