Navigating through price volatility

The aftermath of the COVID-19 pandemic is crippling supply chains across the globe. This is affecting the delivery of critical infrastructure projects, new services and the production required to support the needs of businesses to service their clients and consumers. 

Looking at the global landscape, price spikes, supply shortages and delivery delays are the major issues for the construction industry and its broader ecosystem. Looking ahead, these issues will also be impacted by rising interest rates and uncertain economic growth, which will inevitably create further disruption.

According to a recent survey by the Australian Bureau of Statistics (ABS), the most common supply chain issues facing businesses are domestic and international delivery delays (88%), supply constraints (80%), and an increase in prices (75%).

The uncertainty of pricing volatility and construction cost rises are also causing ambiguity in business investment planning. So where do we go from here?

Amid this disruption and uncertainty lies opportunities to rethink the ways we make business decisions and engage business to business. 

Beca's Sound Bites host Mark Robertson – Market Segment Leader in the Food and Life Sciences sector, is joined by Anthony Maurici – Senior Project Manager in Industrial from Australia and Andrew Hofmeyer - Technical Director in Cost Management from New Zealand. During this conversation, they offer their advice on reframing approaches, and suggest some strategies for managing the current pricing volatility in the market.

If the crisis has taught us anything, it’s those who act quickly to come out on top.

 

Here are our top tips when dealing with price volatility

 

Prepare a robust business case

Transparency and sharing of assumptions across all departments of a business is vital during the business case development stage. From the supply chain management team to the sales team, all parts of the business must sit together to align their goals and approach for how they are going to collectively bring this aspiration to life.

When developing a business case, there are also a few important questions to consider:

1. Looking at all the facets of the business, can this project afford to wait?

Through a business case analysis, find out what your do-nothing position looks like and use this as your reference point when calculating benefits.

"From a commercial perspective, when the market is down, it may be best to pick it up when it's on the rise again," states Andrew Hofmeyr.

2. Are you set up for what might come over the next two years?

Before committing to a project, a sensitivity analysis is highly important when preparing a business case. This may involve a complicated assessment of investigating how multiple key factors could change over time and impact the return on investment. Understanding the break-even position or tipping points is important to be noted and then tracked as the project progresses. Inserting review gates throughout the process to check the business case fundamentals can help identify when changes in tack are required. The cycle of change can be as fast as weeks, not months.

3. Is the product or service you’re selling time-critical in nature or market opportunity?

If time is of the essence, then there is a business need to either meet a customer need, avoid a loss, or capture a significant saving. Under these scenarios, proactive risk management becomes critical and truly understanding both sides of the cost-benefit coin.

"I'm working on several supply chain projects for clients, and although they have an upper cost, the benefits have also moved because the whole market has gone up," explains Anthony Maurici.

"While the project is increasing in cost, on the flip side there may be an increase in benefits moving forward with the project if it’s time bound. Hence those two factors are moving at a similar rate. This may continue to make business sense, as opposed to a fixed benefit project, that you’re trying to unlock with a variable and escalating cost," says Mark Robertson.

 

Assess your procurement strategy

Before the pandemic, many client buyers could go to the market to seek out what they wanted. Often, they would have a multitude of sellers climbing over themselves to secure that deal.

With a shift in the market, sellers in high demand are now much more conscious of the risks they are taking on. Some contractors have never recovered from the ghosts of contracts signed up to pre-pandemic.

The positive outcome we're seeing is that clients are becoming more aware of the impact of their procurement strategy has on the effective delivery of their project. Hence, a more collaborative approach to project delivery is evolving in the marketplace. There is still a delicate balance of maintaining competitive tension for the client, while still providing an attractive opportunity to the seller.
 

Engage with the market early

Many contractors have deep order books with constraints on resourcing and materials supply. Finding those that have the capability and capacity in the market early and starting the conversation is critical.

Through a pre-qualification or expressions of interest process, clients can start sounding out the market for their interest and ability to support the project. This can allow issues such as not-so-obvious long lead times, commercial conditions and which cost elements are the most volatile, to be fleshed out in the early stages. If this can be done pre-capex approval, then this information can be fed into the business case planning and analysis.

 

Treat your contractors as part of the team

Extending the value chain to think about your contractors as part of the team, is leading to greater sharing of risks and increases the likelihood that all parties benefit from the project endeavour.

Whilst all buyers want a competitive price, risk sits best with the party who is best able to manage it. For example, commodity escalation risk is best managed by the contractors procuring it. If the contractor fully allows for the risk, then the client pays for this mitigation. Alternatively, if it's not accounted for the contractor may lose all profit on the job. Making an aware decision on where to allocate this risk or how to share is critical.

"Get out of the lowest price mentality. The lowest price doesn't always equal best mitigation of risk," said Andrew Hofmeyer.

From a consultancy perspective, its important to work closely with the client and contractors to find a mutually agreeable outcome that is suitable for the project. 

"It's not a one-size-fits-all. Enterprise models and early contractor involvement models are being developed by for example, water utility companies that have an ongoing workstream. From that perspective, they can move into a different model of sustainable project delivery, however, their project delivery team are more understanding and accommodating of the uncertainties today that are significantly greater than before," said Andrew Hofmeyer.

 

The bottom line – “Change is inevitable. Growth is optional." John C. Maxwell

Market volatility is here to stay for some time. How the delivery of projects used to be managed, no longer applies to the degree of change and proactive management that is now required.

This environment has however created opportunities for better galvanizing what is trying to be achieved collectively in the business case stage. Greater thought is going into procurement strategy and planning, with far earlier market engagement. A collaborative approach to delivery across the whole value chain is helping all parties navigate the current storm and come out the other side.
 

If you would like to know how we can support you through navigating price volatility, get in touch with our team below:

• Mark Robertson – Market Segment Leader, Food & Life Sciences AU
• Anthony Maurici – Senior Project Manager, Industrial AU
• Andrew Hofmeyer – Technical Director, Cost Management NZ
• Hamish McCook – Segment Manager, Food & Life Sciences NZ

Want to learn more about price volatility? You can listen to the full podcast here. 

These insights are taken from Episode 21 of Beca’s F&B Sounds Bites podcast series. F&B Sound Bites covers hot topics, trends and challenges for professionals in the engine room behind the Food and Beverage industry, hosted by Mark Robertson and Hamish McCook.


Photo by Robson Hatsukami Morgan on Unsplash