Commodity
Definition:
In procurement, a commodity refers to a good or service that is standardized and interchangeable with other goods or services of the same type. Commodities are typically traded in large volumes and have little differentiation between suppliers, making price the primary basis for competition.
Example:
Acme Manufacturing purchases various commodities, such as steel, aluminum, and plastic resins, as raw materials for its production processes. These materials are widely available from multiple suppliers and are largely undifferentiated in terms of quality or specifications. As a result, Acme's procurement team focuses on negotiating the best prices and securing reliable supply sources for these commodity inputs.
Why is it Important to Procurement?:
Understanding and effectively managing commodity purchases is important for procurement teams, as commodities can represent a significant portion of an organization's spend and have a direct impact on production costs and profitability. Procurement teams must stay informed about commodity market trends, pricing dynamics, and supply risks to make strategic sourcing decisions. Effective commodity management may involve techniques such as hedging, long-term contracts, supplier diversification, and continuous market analysis. By optimizing commodity procurement, procurement teams can help to control costs, mitigate supply risks, and support the organization's overall competitiveness.