Procurement and Supply Chain: Tips and Tricks to Prepare for Commodity Market Volatility (Part 2)

In the first post in this series, we explored a range of suggestions examining ways to mitigate commodity risk management from a procurement and supply chain angle from Accenture, courtesy of Triple Point's commodity risk management blog. The fourth suggestion on Accenture's list to target commodity volatility is to "optimize trading agility and integrate sourcing needs." This, of course, is easier said than done. While Accenture does not offer tactics for bridging sourcing strategy and trading, we've attempted to tackle the topic on our own (readers can download two Spend Matters research reports at the end of this post going into more detail).

As a first step, Spend Matters recommends that "organizations need access to their underlying commodity exposure and coverage to build material and total cost models. Such visibility can enable a dynamic view into cost, as well as how individual drivers and underlying elements (e.g. commodities; transportation surcharges) can impact an actual P&L based on changes in the market. Effective Commodity Management can also enable organizations to optimize planning approaches by linking the commodity and financial supply chains with material supply chains. Such visibility can even lead to new strategies, such as demand aggregation across a supply base to reduce volatility and risk."

But even more fundamentally, we note in our research that these strategies link "the physical and financial worlds for basic accounting, product scheduling, contract and pricing effectiveness. The relationship between effective Commodity Management and financial and operational execution -- from accounting properly for hedges to linking, matching and allocating purchase orders and production schedules to underlying positions -- cannot be overstated."

Accenture suggests, "today's market leaders use advanced simulation technologies to model demand forecasts and make refined trading decisions based on forecasted as well as unanticipated needs. Look to integrate the needs of the sourcing units -- from logistics through invoicing and financial processes."

If you're looking for details on how to accomplish what Accenture recommends, we recommend downloading two research briefs from the Spend Matters Research Library (registration required):

Beyond Sourcing and Supply Chain: Commodity Management Solution Fundamentals -- Understanding Approaches for Pursuing the Most Volatile, Critical and [Often] Largest Component of Company Spend

Minimizing Commodity Volatility Through Advanced?Commodity Management and Hedging Approaches

These papers are free to qualified practitioners that register for the Spend Matters research library.

- Jason Busch

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