Dairy purchasing is a key accountability for lots of different people across many different types of companies. Procurement teams for cheese retailers. Commodities managers for food manufacturers. VPs at sports nutrition companies.
But no matter the position you’re in, your first step will be the same.
Set goals to guide proactive buying behavior
When we work with buyers who find themselves in tough situations — in need of milk with no reasonable spot market in sight — they almost always get there the same way. They lose sight of their goals and get sucked into a pattern of reacting to market dynamics.
Start by clarifying your goals
Different organizations have remarkably different purchasing goals, especially accounting for the different types of dairy products on the market and the different ways to use them. So the first step has to be clarifying your objectives and getting clear about what’s most important.
If you’re buying dairy as an ingredient to go into a retail product, like butter for pastries or sweet whey powder for snack foods, you’ll have different goals than a cheese shredder, for whom the commodity price of cheese can drive the retail price they pass to their customers.
This distinction affects the way you think about everything, from inventory and price to product quality.
Successful dairy buyers will have clear objectives related to some, if not all, of the following:
- Absolute price
- Product quality
- Product consistency
- Logistical flexibility or consistency
- Inventory management
The most straightforward way to set priorities starts with asking yourself a question like, “What type of purchasing failure would get me fired?” You could call your related objectives “needs.” And then what about the less critical, important metrics? Call them “goals.” Anything lower priority is a “nice-to-have.”
Once you’re clear about your needs, goals and nice-to-haves, you can start making good decisions based on market fundamentals, technical analysis and market intelligence.
“Quality product” is an important, complicated goal
Dairy product quality isn’t measured on a single slider, ranging from “bad quality” on the left to “good quality” on the right. That’s a false dichotomy that gets in the way of productive conversations about dairy purchasing.
But there are right and wrong characteristics for dairy products to have, based on how you plan to use the product.
- Functionality (meltability, solubility, consistency, granularity )
- Nutritional profile (Proteins, carbs, fat, etc.)
- Acid development
Know what your ideal product looks like, as well as your tolerance for deviation from that ideal. The clearer your understanding, the more effective your buying will be, and the less likely it is that you saddle your production team with an ingredient or supply problem.
How to achieve your goals? Lead with transparency
Most commodity buyers have a well-defined set of needs when it comes to the product itself. Their goals in terms of price tend to be less rigid. Agreeing on price often involves some compromises, depending on the market at the time.
But transparent buyers find themselves compromising on their price objectives far less than others. Which makes sense, when you consider the nature of a dairy transaction: two parties agreeing on the fair value of a perishable commodity.
When a buyer keeps their objectives close to their chest, it impedes the seller’s ability to be helpful. But why would a seller want to be helpful? Don’t they want the highest possible price? Sure, but not at the risk of not being able to move their perishable product.
Sellers have their own objectives, and they aren’t always in direct conflict with yours. When you articulate your most important objectives, along with the “when” and the “how much,” you put the seller in a stronger position to help you.
Then, when you ask, “Is there anything, after listening to me, that we can do a little differently to get a better price?” the seller knows where you can and can’t compromise. And they’ll know what they can do to make sure a good buyer doesn’t go elsewhere.
What if you’re buying from a trader?
Transparency becomes even more powerful when buying from traders. A trader can leverage understanding of what you need and what you’re trying to accomplish across a much larger supply network.
If you have stringent product quality needs, it is important to work with a trader who knows how and where to obtain the right product. Once that part is figured out, you can work with them to see what type of purchase and contract gets you the best price result based on your goals.
When you work with a trader, there are also a lot of purchasing tactics at your disposal when it comes time to determine a price.
The tactics at your disposal when you work with a trader
Buying dairy products isn’t just tapping a credit card onto a scanner and signing a receipt. Which is a good thing for buyers, because more complex purchasing tactics increase your ability to meet your goals without putting yourself in constant conflict with sellers or the market itself.
Some of the common purchasing tactics at your disposal are:
- Fixed-price (or “flat price”) contracts
- Fixed-index contracts
- Opportunity buys
A fixed-price contract is an arrangement where you agree to purchase an amount of a dairy ingredient for a period of time at a price that remains flat, despite any movements of the CME spot price or futures price for the ingredient.
If you’re buying a dairy ingredient (like butter, for example) for use in a complex product (like a pastry), then you may have price objectives related to reducing price risk, rather than outperforming the market’s price. In these cases, fixed-price agreements can remove supply risk and price risk entirely — and fix your dairy input costs for a long-term period.
A fixed-index contract arranges to lock in your price for an amount of cheese and length of time relative to the CME spot or futures price. You may sign a contract for x loads at 10 cents under the weekly futures price. Most commodities trade with contracts like this.
Sometimes this is called using a “basis.” This doesn’t totally eliminate your price risk, since you’ll still be hurt by a price spike, but it can eliminate your supply risk by guaranteeing you access to product even if the market gets tight.
“Opportunity buy” is a term referring to a one-time purchase aimed at capitalizing on an opportunity. In the perfect buyer-trader relationship, both parties start conversations about opportunities that arise. For instance, if we see a volume of black whey available at a steep discount, we may know a buyer who can take on a high volume of black whey to blend with their white whey.
These tactics become infinitely simpler to deploy when you have clear goals and communicate them transparently with a trader. With understanding of your situation, a trader can leverage their network and their own risk management to meet whatever need you have.
Want help building and implementing your dairy procurement strategy?
Reach out. Whether you’re looking to diversify your supply chain, start sourcing a new ingredient or just talk shop about where the market’s headed and how it could affect your operation, we’d love to talk.
We’ll probably ask you some questions about your purchasing objectives and goals to get things started.