Three Things to Consider When Choosing A Chemical Index Model

When purchasing needed chemicals for your business, an index model can be a valuable resource to gauge the price of a product over the long term and provide price stability in volatile markets. Yet, one of the challenges of relying on an index when purchasing chemicals is ensuring you are using the correct index to accurately represent pricing for the particular chemical you are procuring.

An index represents data compiled from supplier information and forecasts of future impacts—which can include raw material pricing, logistics, or production disruptions—on the supply chain. Using the right index model to accurately price your chemical purchases can help protect your bottom line and ensure that you are getting the best value from your supplier.

Here are three things to take into consideration when selecting an index:

Consider the merits of quarterly versus monthly indexes

Indexes can be updated either quarterly or monthly and both methods have their advantages, or drawbacks, depending on the size and frequency of your company’s chemical purchases. Using a quarterly model can be beneficial for companies that are purchasing a chemical in smaller quantities because the price is a bit more stabilized. One drawback is the possibility of paying a premium price if a purchase is made right before a downward trend. For companies making frequent purchases in larger quantities a monthly index would be more beneficial.

Determine which index best tracks your chemicals

If you are purchasing a product that has a blend of chemicals—as opposed to a straight chemical like sodium hydroxide—it’s beneficial to use an index to track pricing based on the product’s predominant chemical. For example, antifreeze pricing can be patterned after an index that tracks ethylene glycol, since that is its main ingredient.

Maintain market visibility

It’s also wise to keep an eye on the indexes that track the chemicals you frequently purchase to ensure that you are on the same page as your supplier. Be aware of any issues, pending regulations or potential supply chain disruptions that could cause the pricing of your materials to fluctuate. Also, consider consulting with a third party to guide you through the best practices in handling future index oscillations.

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