INPUT COST VOLATILITY

The impact of commodity price fluctuations

INPUT COST VOLATILITY

COMMODITY FLUCTUATIONS ripple through the
supply chain

While the 2010s were characterized by relatively stable, low inflation, the early 2020s have brought unprecedented input price turbulence, fueled by pandemic shocks, supply and demand imbalances, energy crises, and geopolitical conflict.

This chapter introduces the Input Cost Volatility Index, which draws on 10 years of Producer Price Index (PPI) data to track price fluctuations in raw materials and intermediate goods across countries.

DRIVERS OF INPUT COST VOLATILITY

The top 10 countries in the index show how inflation, currency movement, energy dependency, and commodity exposure intersect to shape sourcing risk.

Turkey (ranked 1) and Russia (ranked 3) saw significant volatility from currency devaluation and geopolitical instability.
Saudi Arabia (ranked 2) was hit by extreme oil price swings, with Brent crude rebounding from pandemic-era lows to over $120 per barrel in 2022 before moderating.

These shifts aren’t just macroeconomic. They ripple through supply chains, eroding supply predictability and pricing stability. Buyers basing sourcing decisions purely on today’s cost or availability signals, without building in flexibility, are absorbing a hidden risk, especially in countries ranked high on the index.

Such volatility has a direct knock-on effect on supply chains. A supplier’s input costs might double in one year and plummet the next, destabilizing long-term contracts, margins, and project schedules. For example, Turkey’s PPI inflation peaked above 140% in 2022, triggered by currency collapse and a surge in energy import costs, leaving fixed-cost supply agreements severely exposed.

MID-TIER ECONOMIES WITH HIGH VOLATILITY

Even countries outside the top five in the index reveal important watch-outs for buyers:

Brazil, heavily reliant on iron, ore, and soy, sees cost structures swing with global demand, such as commodity demand from China and global food markets.
Colombia, tied to oil, coffee, and coal, experienced spikes in input costs linked to energy price surges and labor unrest.
In South Africa, frequent labor strikes, energy price volatility, and high import dependence on industrial goods (notably in the auto and tech sectors) create cost instability. Flexible contracts and pre-emptive stockpiling of critical materials are essential in these markets.

Even Mexico, considered more stable, is highly integrated into North American supply chains. Volatility in the price of semiconductors, metals, or plastics in the US, China, or Europe can quickly impact costs in Mexico’s manufacturing and automotive sectors.

MULTI-TIER
supply chains
are most impacted

DEVELOPED ECONOMIES ARE NOT IMMUNE

High input cost volatility is not limited to emerging markets. Several advanced economies also appear in the top 10 due to their industrial exposure:

Germany’s industrial base has struggled with gas price volatility following the Ukraine war, threatening manufacturing competitiveness.
Spain saw steel and cement prices spike, delaying infrastructure and construction projects.
Australia, a major lithium, coal, and iron ore exporter, is deeply exposed to demand shifts and commodity futures markets.

In developed economies, the issue is less about runaway inflation and more about their exposure to global commodity cycles and industrial interdependence.

SECTOR SPOTLIGHT: WHICH FEELS IT MOST?

The sectors most exposed to input volatility are those most dependent on commodity-linked or globally traded materials, including:

Construction – reliant on cement, steel, timber
Energy & Natural Resources – exposed to fuel, chemicals, metals
Healthcare & Life Sciences – dependent on APIs, reagents, and base chemicals

In these sectors, cost volatility is not just a financial concern it’s an operational risk. It can delay product launches, trigger SLA breaches, or make projects financially unviable. During COVID-19, for example, API shortages and cost surges disrupted pharmaceutical manufacturing globally, leading to shortages and emergency sourcing.

SOURCING AND SUPPLY TACTICS

Manage relationships to protect and enhance the value negotiated. In volatile markets, value is often lost during the contract lifecycle. CLM and SRM approaches converge when it comes to embedding the right contractual and relationship mechanisms to adjust to market shifts.

Contracts should have price indexation clauses, walk-away rights, and structured review triggers that allow them to evolve as markets shift. For example, Post-COVID, Schneider Electric introduced a centralized CLM system that flagged high-volatility items and indexed them to live commodity benchmarks, enabling faster renegotiation.

Similarly, relationships benefit from proactive monitoring and management, including a focus on the performance and the value of suppliers.

Hedging offers price predictability when input prices swing wildly. By locking in future prices for key commodities or currencies through forwards or options, procurement can protect margins and reduce budgeting uncertainty. This approach is commonplace in markets like energy, grains, and metals.

Hedging works well in sectors with predictable demand. Airlines, for example, hedge up to 80% of fuel needs, saving billions when markets spike. Hedging won’t fix supply disruptions, but when integrated with procurement planning, it buffers the impact of inflation cycles. Partnering with finance or a specialist consultancy ensures the right structures are in place for meaningful protection.

Inventory management can be a frontline defense against supply volatility. Rather than simply stockpiling, some organizations use inventory as more of a strategic hedge, building based on market conditions, holding safety stocks when volatility grows, and replenishing when prices dip.

For example, GE Healthcare uses inventory hubs to protect critical supplies and Caterpillar has pre-bought metals and components to counter inflation surges.

Not all goods lend themselves to inventory management, and some that do might require specialist facilities like cold storage or strategies like bonded warehousing to strategically place stock without incurring import duty.

3 | STRATEGIC INVENTORY
MANAGEMENT

2 | FINANCIAL HEDGING

1 | CONTRACT LIFECYCLE MANAGEMENT & SUPPLIER RELATIONSHIP MANAGEMENT

SOURCING AND SUPPLY TACTICS

Input cost volatility is now a permanent feature of global sourcing, not a passing disruption. Procurement must embed contractual agility, cost hedging, scenario planning, and multi-source strategies to maintain resilience.