The Race to Manage Risk in the Automotive Supply Chain (Part 2)

In yesterday's post, Michael Schwartz of Triple Point Technology let us know that many auto manufacturers are looking toward energy companies and commodity houses for lessons into how to manage risk. See the continuation below:

Tightening demand/supply equations: Geo-political events continue to cause supply-side disruptions, but now the problems are compacted by long-term demand-side trends. Analysts generally agree that demand-side growth fueled by an aspirant middle class in non-OECD countries is here for the foreseeable future -- tightening an already precarious supply/demand equation. The slightest alteration on either side brings wild swings in commodity prices.

Clearly volatility is a source of risk, especially for organizations not used to running their day-to-day operations amid such rapid fluctuations in prices. But it's important to remember that volatility also brings opportunity. Those that embrace the 'new normal' and put the processes and systems in place to better manage volatility and risk will do better than competitors.

Profitably managing commodity procurement: To preserve margins, industrial manufacturers have to take a different and more proactive approach to commodity procurement. Many industrial manufacturing organizations still acquire commodities in much the same way they procure non-commodity supplies. But this does nothing to protect a firm from volatility in multiple markets, and denies them the opportunity to maximize opportunities presented by that volatility. Traditional procurement methods have to change: this is the next breakthrough in supply chain management.

Automotive companies will have to start taking on some of the characteristics of commodity management houses, learn the lessons of turning a profit in rapidly fluctuating markets and adopt the risk management processes, tools and measurements required to optimize their acquisition of raw materials.

This is undoubtedly a risky proposition without the right tools. In fighting price risk, manufacturers can open themselves up to earnings risk. Again they will need to turn to the world of commodity management for the tools and solutions that ensure compliance with the regulatory demands for disclosure and hedge accounting. It may be tempting to shy away from this new reality, and to opt to remain in what feels like the relative security of the status quo. But the risks are real, and need to be addressed head on. By using sophisticated systems, energy companies and commodity houses are able to participate fully in the markets, buying and selling physical commodities and their financial derivatives and then managing the logistics of their transport in the most advantageous way. This is the unavoidable world that automotive manufacturers are now entering, and they must equip themselves accordingly. By taking the lead from their commodity and energy peers, they can follow a time-tested, market-proven path to more profitably and manage the commodity acquisition process -- regardless of the volatile market environment around them.

- Michael Schwartz, Chief Marketing Officer, Triple Point Technology

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