Supply Chain Frontiers issue #31. Read all articles in this issue.
Little research has been done to extend our knowledge of commodity supply chains. Yet commodities are the starting point for many productive processes, both in developed and developing countries. A region’s level of advancement in the extraction, planning, distribution and even recovery of commodities can determine its level of economic development, and these factors are key to the success of companies involved in the manufacture and sale of these products.
Isabel Agudelo, Executive Director of the Latin American Center for Innovation in Logistics (CLI), is leading a research project on supply chain management for commodities that in its first phase is focusing on cement. “Limited research exists on logistics and supply chain management processes for commodities; however, some executives in Latin America have begun to see an opportunity in this area,” said Agudelo.
Cementos ARGOS, the market share leader in the Colombian cement market, is actively participating in the research project. “Logistics departments in the cement business have normally been seen as a transportation-related area, but we believe logistics goes beyond that and can become one of the main competitive advantages of a company,” stated Jorge Mario Velásquez, Vice President for Logistics.
Commodity supply chains pose a number of difficult challenges, and gaining a deeper understanding of these issues and the role of supply chain management is one of the research goals.
For example, there are three important historic observations about the commodity business that researchers need to keep in mind. First, when a country moves from a low to a high level of economic development, the relative importance of commodities often decreases as the economy expands. The second element is the impact of transportation costs. In the past, the cost of commodities was low compared with other products, even though transportation costs were relatively high. With the development of new transportation systems such as rail and sea, the cost of moving commodities declined, making imports more profitable than domestic production in some cases. The third element is that governments tend to intervene in commodities markets.
Even though the first phase of the research project is not complete, the work has yielded some interesting findings, as follows.
- The importance of supply chain management varies depending on whether commodities companies are focused on cost or service. Oil companies are focused primarily on service, while cement companies, for example, are focused primarily on cost. As a result, practices for handling inventory, transportation, etc., vary from company to company.
- For some time, commodities companies in the oil industry have outsourced logistics management to contractors, a strategy that has hindered the development of their own supply chain management expertise in this area. For commodities companies that bear substantial supply chain costs, there is motivation to integrate vertically by acquiring terminals, rail lines, transportation companies, etc. This allows them to more closely control the costs of the operation.
- Lastly, in some commodity industries there is no balance between the power of supply and demand, and in these situations the supplier has less incentive to lower costs, and therefore, to focus on supply chain management.
The opportunities offered by the development of supply chain management expertise in commodities companies are immense. However, companies must change the traditional way in which they view the business, and identify the incentives that will allow them to make a strategic change of course and turn logistics into a source of competitive advantage.
For more information on the Commodities Supply Chain Research Project, please contact Isabel Agudelo, iagudelo@logyca.org , who is currently attending the Master of Engineering Logistics program (MLOG) at MIT CTL.