Given that CPG, food and related inflationary pressures are cycling their way through the supply chain and into big box aisles in Walmart (See previous posts here and here), it's clear that a combination of inflationary pressures and overall commodity volatility are here to stay, at least for the coming quarters. But how should manufacturers, CPG/food producers and retailers alike begin to more actively manage commodity price pressures and variability? Below, we offer a handful of ideas, grouped into three categories: policy, technology and skills.
Policy: A surprising number of companies have a "no hedging" policy when it comes to commodity prices (currencies are often handled separately, by treasury, and not by internal procurement/trading functions). This binary type of statement seems at odds to me with the need to evaluate more flexible commodity strategies in today's market. Moreover, with increasing types of "hedges" available in the past -- and the question as to what really constitutes a hedge such as whether a long-term price agreement at a market premium for raw material components is in fact a hedge or just a contract -- I think it's time for a wholesale reevaluation of how best to deal with commodity price volatility for corporate governance.
Technology: There are multiple types of technology that organizations should consider implementing to deploy commodity management strategies and track commodity risk exposure. These range from integrating price indexes in native sourcing, contracting and ERP applications to hybrid spend analysis and total cost management/modeling tools to understand raw material price components and variability for SKUs, items, parts, components, etc. Companies engaged in hedging and related commodity management activities will also want to consider an entirely new set of vendors (e.g., Triple Point) that can help determine optimal hedging strategies, track portfolio exposure, manage accounting implications of positions/trades and related program administration activities.
Skills: Aside from companies with active trading functions, only a minority of organizations have the skill sets required within procurement to tackle the active management of commodity volatility, especially outside negotiating/contracting with suppliers (but also to inform these efforts as well). Procurement organizations will need to either work more closely with finance groups (those that have access to individuals with the right skill sets) or bring in new resources with a more focused finance and trading background.