Bob Rudzki is one of the few bloggers/journalsts/analysts I've seen who has a good handle on how hedging can play an integral role in helping procurement organizations manage risk. Over on Supply Chain Management Review, he continues to share ideas and anecdotes from his book Straight to the Bottom Line about how "price risk management of commodities represents an opportunity to lock in prices consistent with business plan assumptions, and reduce earnings risk" while also serving as "an opportunity to separate pricing decisions from the physical supply decision, and to potentially reduce the amount of capital tied up in physical inventories."
What are some of Bob's tips for getting hedging right? For one, he suggests as a key initial step the importance of taking a company's temperture on their "appetite or aversion" to risk. I also like his suggestion to "have a consolidated (single) strategy across all business groups" where possible. But perhaps the most important piece of advice I can add to his full list -- which I strongly suggest reading -- is to determine a strategy and stick with it regardless of market conditions. A Spend Matters reader recently commented that many of the CPG companies just getting into trading (and hedging) at the tailend of the commodities boom are the ones who have the most to lose as their positions go under water. Let's just hope they learn for the future that hedging is something that requires a long view and should never result from a knee-jerk reaction to commodity costs or shortages.
- Jason Busch