Why material volatility creates more than a purchasing problem

Metals, polymers, energy and alloying elements can change significantly over the life of a product. When companies rely only on historical purchase prices, cost transparency quickly deteriorates. A supplier increase may be accepted because the market has moved, or rejected even though the underlying inputs genuinely changed. In both cases, the lack of a transparent model weakens decision quality.

Material volatility affects quotation, target costing, product profitability and design strategy. It should therefore be managed jointly by procurement, cost engineering and product development.

Build a should-cost material model

A robust model separates the physical material content from commercial effects. It includes net weight, process yield, scrap generation, scrap credit, alloy composition, conversion premium, delivery form, logistics and relevant surcharges. For alloys, the influence of base metal and alloying elements should be transparent. For polymers, feedstock and energy exposure may be important.

The model should link selected parameters to appropriate market indices and define a reference date, currency, region and update frequency. An index does not represent the complete supplier price, but it provides an objective explanation of how a defined cost element has changed.

Use models in supplier negotiations

Index-based logic makes negotiations more precise. Instead of discussing a single percentage increase, buyer and supplier can review which cost elements changed and by how much. The same logic should apply when markets fall. Symmetrical adjustment mechanisms improve fairness and reduce recurring conflict.

The model also helps distinguish material-driven changes from other requests such as labour, energy, overhead or margin. Each element can be evaluated with the appropriate evidence. This strengthens the commercial position without ignoring legitimate supplier exposure.

Support engineering and sourcing decisions

Price volatility can change the relative attractiveness of materials and processes. A concept that was competitive at one price level may become vulnerable when a critical alloying element rises. Scenario analysis allows teams to compare alternatives under different market conditions.

However, material substitution must consider more than price per kilogram. Density, mechanical performance, corrosion resistance, manufacturability, availability, recycling value and qualification effort influence the total business case. A more expensive material can reduce weight, cycle time or part count; a cheaper material can increase processing cost or risk.

Create a repeatable governance process

Companies should define approved indices, update responsibilities and treatment of lags, averages and currency effects. Supplier contracts should describe the formula clearly. Cost models should retain historical reference values so that changes can be reconstructed.

With this foundation, material volatility becomes manageable. The organisation can quantify exposure, identify high-risk products, negotiate changes consistently and make earlier design decisions. Better models do not eliminate volatility, but they prevent uncertainty from becoming uncontrolled margin loss.

RENNET perspective

RENNET combines industrial expertise, Cost and Value Engineering methods, manufacturing knowledge and digital tools to support fact-based product decisions.

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