Sometimes people know the risks, but prefer the benefits behind them.
A Story of Risk in Purchasing Ammonium Sulfate: A Lesson for Supply Chain Management.
On January 10, 2025, my client planned to purchase 1,000 tons of ammonium sulfate granules. Although we had a long-standing cooperative relationship, I provided the most competitive quote I could, which was $2 per ton higher than the customer's ideal price. Despite our history, the customer ultimately decided to go with a new supplier, HB, and explained that the price difference of $2 per ton resulted in an additional $2,000 cost, which was significant for their budget.

Out of a sense of responsibility, I shared a few concerns with my client:

Purchasing 1,000 tons of ammonium sulfate from a new supplier carries inherent risks, particularly with bulk commodities.
From my over ten years of industry experience, I knew that HB was a newly established small factory. While their equipment was new, their production capacity and market reputation had yet to be proven.

The customer responded by saying they had conducted due diligence:

They confirmed that while the factory was small, it had advanced equipment and favorable production conditions.
The supplier's sales representative had also convinced them to pay a 50% advance in exchange for a lower price, citing the need to prepare raw materials before the Spring Festival.
They had a long time talking, everything is fine, he trust him.

At that time, the Chinese Spring Festival holiday was approaching (January 28–February 4, 2025). After the holiday, ammonium sulfate prices experienced significant fluctuations:

First week post-Festival (February 3-7): Prices began to rise.
Second week (February 10-14): Prices continued to climb.
Third week (February 14-21): Prices surged by over $15 per ton.

Just days before the ship rented by my client was set to dock, the supplier informed them that they couldn’t fulfill the order on time. They claimed the factory was still producing ammonium chloride granules and couldn’t switch to ammonium sulfate production immediately. As a gesture of goodwill, they offered to refund the full advance payment.

However, this excuse seemed hollow. The real reason behind the delay was the supplier’s decision to capitalize on the rising prices and resell the goods to other buyers at a higher cost. Returning the advance payment was their only effort to mitigate the situation.

Key Risks Identified

This situation reveals several critical risks in supply chain management:

Risk of Price Fluctuations As a commodity, ammonium sulfate prices are influenced by market supply and demand, raw material costs, and seasonal factors. The price surge after the Spring Festival left the supplier with the temptation to breach the contract and sell to higher-paying customers. The client, in this case, failed to anticipate the market shifts and missed the opportunity to lock in a lower price.
Risk of Supplier Selection Choosing a new supplier, especially one that is a small, newly established factory, increases the risk. Although HB had new equipment, its lack of established production capacity and a market reputation meant the customer was betting on an unproven partner. Making large purchases and committing to a 50% advance payment exacerbated this risk.
Risk of Advance Payments Advance payments are often necessary in transactions, but paying 50% upfront without a reliable track record on the part of the supplier can lead to significant risks. Although the advance was refunded, it did little to mitigate the missed opportunity to lock in prices before the increase.

Experience and Recommendations

This case highlights the importance of better risk management in procurement. Here are some takeaways and recommendations:

Diversify Your Supplier Network Relying on a single supplier, particularly when purchasing bulk commodities, can expose you to significant risks. A diversified supplier network helps mitigate these risks by reducing dependence on any one source.
Thorough Supplier Evaluation When choosing a new supplier, it is crucial to conduct a comprehensive background check on their production capacity, financial stability, and reputation in the market. This helps avoid cooperating with unreliable or unproven suppliers.
Market Risk Management and Forecasting In volatile markets, it is important to anticipate price fluctuations and put in place hedging or other risk management strategies to minimize exposure to price increases.
Maintain Long-term Relationships with Customers While my client chose another supplier in this instance, maintaining a strong, professional relationship through regular market insights and advice ensures they continue to trust and value our expertise. In the future, they may return when facing difficulties with HB or other vendors.