How to mitigate price fluctuations of building materials through B2B rebate deals
Rising building material costs have become volatile around the world. FMB's latest State of Trade Survey revealed that 93% of its members have reported material price increases in the first quarter of 2021.
Price fluctuations of building materials are driven by lengthening lead times and increasing demand, which is making it difficult for manufacturers and suppliers to build up stock levels. Supply isn’t meeting demand but it’s not just the increased number of building projects creating a shortage, the Covid-19 pandemic has added an increased emphasis on shortages due to factory closures, logistical issues and lack of labor force.
Building materials like timber, stell, roof tiles, cement and electrical components are all in short supply. All this uncertainty in the supply chain creates the possibility for vast fluctuations in price. According to the NAHB, current lumber costs are up 340% from 2020, meaning they have already risen by an additional 67% since the beginning of 2021.
As anyone in the building materials industry will know, such variations can cause all manner of problems. One way to better manage the effects of these price fluctuations is to use more strategic rebate management methods when it comes time to restructuring B2B deals.
Plan-ahead with accurate data
Trading partners should be actively communicating and committing to approaching the challenge of a volatile building materials marketplace in a cooperative manner. Recognizing that having accurate and real-time data on your deals is key to profitable growth and by planning deals well ahead of time, you may achieve a better pricing strategy.
Focus on shorter term deals
With a volatile market comes volatile pricing, and things can change fast. When creating a deal with your supplier, instead of focusing on yearly terms, it might be worth considering concentrating on shorter term deals. As with stock shortages and price fluctuations, it can be difficult to predict what will happen over such a long period of time. Therefore, favouring shorter terms agreements can allow business to be more reactive to the market and ensure that they always have the best deal in place.
Use strategic mechanisms to protect rebate revenue
Where price fluctuations are common in a particular material or product, it may be worthwhile considering using a more targeted mechanism when structuring rebate agreements for that particular product. For example, ‘Per Unit Rate’ deals are commonplace in the building materials industry, however a serious price fluctuation can leave one party feeling hard done by, when the price of an item changes considerably, yet the rebate earnings do not adjust in line with the outlay. In such cases, it may be worth considering implementing a ‘Fixed %’ mechanism instead, to allow the rebate amount to follow the fluctuation in price. This can keep all parties content and help to strengthen trading relationships all round.
While many of those in the building materials sector still track performance of their deals manually at year end or at best quarterly, with rebate management software you can see a daily dashboard of deal performance. This way of tracking enhances the performance of purchasing and sales teams by enabling them to make more informed and data driven decisions. Knowing exactly why your best deals are performing at their best can allow you to replicate this across the board, hence helping to mitigate the effects of unpredictable price fluctuations in the supply chain.
Clear contract terms
Clear communication between trading partners is vital to a healthy trading relationship. It is crucial to ensure that clear contract terms that cover all eventualities are laid out upfront, therefore avoiding disputes around what happens in the case of any price fluctuations or increases. A good rebate management tool will allow the communicating of contract terms alongside any rebate agreements that are in place, along with allowing both parties to agree in writing to any special terms, and ensure full visibility to both sides from the start.
Managing price fluctuations of building materials going forward
Processes around managing price fluctuations must become more streamlined, more transparent and more effective in reacting to changing market environments. Having a rebate management system that houses all your deals with various suppliers will help you overcome deal complexity and constant pricing fluctuations that the building materials market is currently seeing.