What Is a Strategic Commodity? 4 Facts You Need To Know

 What exactly is a Strategic Good? A Strategic Commodity is a market in which supply and demand are tightly correlated and subject to a specific price-setting mechanism.

The supply and demand of oil, for instance, are determined by the energy situation (demand) and the supply of raw materials. The article that follows will provide the most specific information on the subject. 

What Is a Strategic Commodity?

A strategic commodity is one that is deemed to be of the utmost importance to a nation’s economy, typically to the extent that if the open trade of the commodity is disrupted, the economy will suffer greatly.

Generally, commodities are considered to be raw materials or agricultural products that can be purchased and sold for investment purposes as well as continued consumption. The active trade of certain commodities may support a nation’s economy.

What Is a Strategic Commodity?

If a commodity that significantly contributes to a nation’s economic stability suddenly became unavailable, the consequences could be severe.

How to Determine the Composition of Strategic Commodity?

It is not always simple to identify a crucial element. While there is unanimity that certain commodities, such as oil, maize, and gold, are strategic, there may be disagreement over others, such as the fertilizers required to grow maize and the alloys that are frequently used with gold.

It is also essential to keep in mind that while certain items may be essential to the economy of one nation, they may have little impact on the economy of another.

In a given context, the classification of a commodity as a strategic commodity depends on the commodity’s significance to economic health. If the supply of that commodity were suddenly and drastically reduced, the majority of consumers who rely on products containing it would suffer catastrophic consequences.

In contrast, a rapid influx of the same product onto the market may result in decreased prices for comparable goods, which consumers would prefer but investors would not necessarily welcome because their profit per unit would be significantly reduced.

Multiple governments monitor a list of strategic commodities that are traded within a nation’s borders. Not only must one be aware of the current state of these commodities, but also their anticipated future availability.

For instance, if the strategic commodity corn is currently being traded at equitable levels, but there is a high likelihood that the supply in an upcoming period will be reduced due to adverse weather or the occurrence of a natural disaster, governments can begin mitigating the effects of this supply reduction immediately.

Idealistically, doing so would mitigate the economic impact of the drop until a large supply of the strategic commodity could be replaced in the future.

Process of developing a commodity sourcing strategy

Your commodity sourcing strategy will be successful if you maximize the cost-saving benefits of leveraging combined buying power for volume discounts, utilizing market experts, utilizing existing commodity price indices, observing commodity price trends, and forming strong, long-lasting relationships with preferred suppliers.

What Is a Strategic Commodity?

For commodity sourcing methods, it is necessary to create a unique strategy for each set of supplies or services. It is crucial to be up-to-date on all information pertaining to a particular category or group.

The information includes commodity index and commodity price developments/trends and can be obtained through a variety of means. The most important factor is that information be shared and utilized internally to continually evaluate and enhance the commodity procurement strategy.

Step 1: Spend analysis

Spend analysis is the first step in linking your company’s sourcing strategy for commodities to its competitive strategy. It requires your company to evaluate all the products and services that are currently being acquired and will be in the near future.

The analysis of expenditures should include the total purchases of supplies and services across all organizational divisions. It should represent both the purchase price and the total cost of ownership.

A comprehensive, documented understanding of your organization’s past, present, and future supply and service acquisitions will be the result.

Step 2: Industry analysis

Examine the supply industry to determine the principal suppliers of the specified product or service based on their market share or geographic location. Your analysis of the industry must account for all competitive dynamics. We recommend adopting Porter’s Five Forces of Competition, which consist of customer power, supplier power, inter-company competition, the threat of substitution, and new market entrants.

The result of the industry analysis should be a diagram of the supply industry for the given product or service, depicting the flow of goods from key suppliers to large consumers and the supply chain function of each organization, such as assembler, manufacturer, or distributor.

Step 3: Identifying and documenting cost and performance drivers

You must have a thorough understanding of key cost drivers and other crucial performance metrics, such as quality, degree of technology, flexibility, and deadlines.

Using various commodity price indexes, graphs, and other information and data sources regarding commodity price trends and comparable factors, we recommend mapping the manufacturing process and documenting all available technology options at each stage of the process in order to gain a better understanding of the various cost and performance drivers.

Step 4: Supplier role analysis

Segment the supplies or services across a set of supplier roles in order to identify the types of suppliers required and the duties each should carry out in the supply chain. This phase may necessitate consideration of sub-commodities, end-users, or stages of the product life cycle.

Regardless of the strategy employed, it is necessary to allocate expenditures by supplier based on the cost drivers identified in the preceding step. Various cost drivers, subcommodities, and life cycle segments may necessitate a unique sourcing strategy for each subcommodity or life cycle segment.

Step 5: Confirm the alignment of business processes

After identifying the supply or service cost drivers, performance indicators, and supplier types and responsibilities, the next step is to validate that your organization’s business processes are appropriately aligned, prioritized, and linked.

What Is a Strategic Commodity?

The purpose of the study of cost drivers and supplier responsibilities is to realign business process priorities with the desired level of integration with your selected suppliers.

Decisions will be made regarding which business processes must be realigned in order to better integrate with suppliers, thereby committing to a cooperative, long-term partnership and gaining a competitive advantage.

Step 6: Savings quantification

Quantify potential savings to ensure that the approach to commodity sourcing results in quantifiable cost reductions. Utilize these savings objectives as a tool for monitoring the strategy’s development and “selling” the final commodities strategy to the senior management of the organization.

Step 7: Implementing the strategy

The implementation of the commodity strategy should be treated as seriously as any other endeavor of comparable magnitude. A successful implementation will be ensured through the use of a formal project management strategy and supplementary tools.

Typically, this entails dividing the intended strategy into a series of actions that will produce the desired savings. The tasks must represent the necessary actions, resources, and milestones for achieving your savings objectives.

Strategic commodity reserves

The primary duty of the Agency’s Division for Strategic Commodity Reserves is to establish and maintain stocks of essential food and non-food items needed in the event of a supply shortage, as well as strategic raw materials and intermediary products required by processing industries or deemed vital to the nation’s defense.

The approach to implementing a program for stockpiling commodity reserves and their release from stock is determined by the Government of the Republic of Slovenia in its five-year program, which specifies the categories and minimum quantities by the type of goods to be held in stock that can be released in the event of a supply disruption resulting from major natural disasters and other emergencies and wars.

On the basis of the Five-Year Work Program, the Agency develops the annual budget and activity programs for each fiscal year. The Administrative Board of the Agency is presented with both documents for approval.

What Is a Strategic Commodity?

The programme for the establishment of stocks and the release of goods held in reserve specifies the target size of the reserves as well as their replenishment and reorganization in accordance with the identified requirements. The stockpiles of items that could become scarce in an emergency are increased or decreased based on government decisions.

If the reserve demand for a specific type of commodity necessitates an increase in stock, the Agency conducts procurement procedures in accordance with procurement rules and regulations. When the Agency sells and places on the market non-strategic equities, strict compliance with public procurement laws is maintained.

The Division for stockholding of commodity reserves of the Republic of Slovenia is tasked with:

  • As part of the public procurement procedure, requests for proposals are issued.
  • Allowing the sale of stocks of national strategic reserves
  • Contracting for storage and replenishment/renewal of reserve supplies kept in the Agency’s own or rented storage facilities, and organizing storage and replenishment/renewal of reserve stocks.
  • Collaborating with storage facility operators and implementing quality and quantity controls for reserve stock,
  • Managing the packing, processing, and transport of goods, as well as ensuring the safety of the Agency’s property,
  • Selling and renting property.

The commodities currently held by the Agency as reserve stocks:

Food commodities (raw agricultural products and processed agricultural products)

Wheat and wheat products (flour, pasta), corn, rice, rye, meat (living creatures), milk and dairy products (dry milk, cheese), sugar, edible oil, water, and salt.

Non-food commodities

Products for humane medicine, products for veterinary medicine, petroleum products for the needs of Slovenia’s law enforcement/police forces, Army, and protection system against natural and other disasters, lubricants, liquefied petroleum gas, products for personal and collective protection, and other products (gas oil and heating oil/stoves, candles…).

The Agency keeps reserve stocks in:

  • storage facilities owned and operated by the Agency,
  • storage facilities owned by the Agency and operated by co-owners or other economic operators/companies chosen on the basis of public tendering procedure,
  • rented storage facilities.

The majority of the goods/items stored in the Agency’s owned and operated storage facilities do not require specific storage conditions and can withstand extended periods of time without being renewed/replaced.

What Is a Strategic Commodity?

The majority of reserve stocks maintained in the Agency’s storage facilities are operated by economic operators/companies in proportions that allow for the stocks to be regularly renewed/refreshed.

The majority of the Agency’s reserve inventories are maintained in rented facilities/warehouses because they require unique storage conditions that the Agency cannot provide with its own storage capabilities, i.e. products with specialized characteristics that must be continually renewed/refreshed.

Conclusion

A strategic commodity is any item with a high demand and a limited supply. In other words, it is a product that consumers desire but must wait to purchase.

Typically, strategic commodities are scarce resources. When there are a large number of people vying for strategic commodities, their prices increase, driving up the cost of all other commodities, from real estate to stocks to gold.

Consider, for instance, diamonds. Carbon occurs naturally in diamonds. As a raw material, it has little worth. However, when placed in the proper setting and cut properly, it becomes a very valuable diamond.

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Pat Moriarty
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