Next Level Sourcing and Commodity Management
Minimizing Commodity Volatility Through Advanced Commodity Management and Hedging Approaches
By Jason Busch and Lisa Reisman (with additional commentary from Brad Clark, FIS Senior Derivatives Broker)
Effective commodity management often requires an entirely new approach to thinking and engaging suppliers. Yet it’s something that procurement organizations across the discrete manufacturing, food, CPG and energy markets must increasingly master if they’re to deliver the type of value that management teams are expecting. In contrast, successfully reducing maverick buying and improving spend compliance, while valuable, represents a fraction of the type of potential savings and risk exposure that focusing on the direct supply chain through commodity management programs can have.
Yet despite the opportunity, it’s our belief that only a fraction of procurement and supply chain organizations are ready for the broader commodity management challenge (especially in discrete manufacturing – A&D, automotive, industrial, etc.). Preparing to jump the commodity risk management hurdle is not easy. Organizations must have the right combination of skills, technology, and market information to manage and act on information and contracts. Moreover, commodity management efforts should drive even more fundamental sourcing strategies than this, starting with a plan to develop basic visibility — ideally, multi-tier visibility — into commodity risk exposure.
This Compass research paper explores the capabilities (including knowledge, process, skills, and technology) that organizations need to better manage volatility across their spend portfolios primarily on the base materials/ingredients level including raw material spend “owned” by suppliers. It provides a foundational background on commodity pricing and risk assumption models (e.g., customers, buying organization, suppliers, third-party), forward contracts, futures, swaps, options, and ETFs.
This Spend Matters / MetalMiner analysis also considers related spend analysis, demand aggregation strategies, direct materials sourcing strategies and supplier contracting models to minimize risk – all from a procurement and supply chain perspective.
If your organization has asked itself any of the following types of questions – or tried to comparatively assess and benchmark itself relative to peers in these and related areas – then you are an ideal candidate to read this analysis:
- How do commodity management strategies integrate with strategic sourcing programs and supplier management?
- Have we considered demand aggregation at different levels of the supply chain?
- Do we have a “no hedge” strategy? If so, why?
- How do we define “hedging” as an organization? If there is a price premium for a longer-term contract lock with a supplier buying material that goes into what we purchase from them, is that a hedge?
- Do we have the right skill set in procurement to address hedging and trading requirements?
- Do we understand the nuances of systems integration to make sure that if we engage in such activity, that we “cover” enough of our exposure but not too much?
- Do we want to invest the time to develop forecasts and perspectives on key categories/commodities for our companies to actively take positions informed by where we believe the market is headed? Or are we more comfortable with the basic taking of risk of the table regardless of what forecasts might suggest?
We encourage you to download this Spend Matters Compass report along with its companion paper: Beyond Sourcing and Supply Chain: Commodity Management Solution Fundamentals — Understanding Approaches for Pursuing the Most Volatile, Critical and [Often] Largest Component of Company Spend