What Are Companies Doing to Stay on Top of Commodity Risk? (Part 2)

Our apologies, Part 3 of this post ran yesterday before Part 2...back to your regularly in-order programming below:

Even before the PWC study referenced in Part 1 of this post shows that a tiny minority of organizations have looked to technology to bridge the procurement (sourcing)/finance (treasury) gap in commodity risk management, Spend Matters has for several months recommended that organizations investigate technology that may help control/price/mitigate/manage commodity risk from vendors such as Brady Solutions, EKA Software, Triple Point and SolArc. Among these, our anecdotal observations suggest that Triple Point appears to have significantly greater traction with procurement organizations on a cross-category basis. Some of these tools were originally designed for commodity trading arms of companies and can provide an invaluable complement to the e-sourcing platforms that so many procurement organizations have invested in. Yet, it's not surprising given PWC's findings that our experience suggests that only a "handful of sourcing organizations are even aware of these vendors," as I recently suggested at various events giving talks on commodity management this spring.

In addition to investigating how technology can help manage commodity price risk and exposure it's also becoming increasingly critical to make sure that your company has the right skill sets to handle commodity volatility within the procurement and finance (regardless of whether treasury takes a leading role or not in the endeavor). For companies with a trading arm -- which probably makes up a small minority or organizations outside the energy, oil and gas and agricultural commodities business -- procurement should take the time to learn more about what they're up to and coordinate efforts accordingly.

Even with limited outside skills, assuming some finance and trading backgrounds in the company, at least a few individuals in your organization should have a good understanding of the financial tools they that are available today, such as hedging using traded options/futures contracts, virtual hedging (e.g., through certain ETFs), more complicated swaps/derivatives, etc. You'd be surprised in the Midwest, for example, how many folks in business have had at least a short stint on one of the Chicago commodity exchanges (even it was only for the summer during an internship in business school or college). In addition, these individuals should understand both how to price commodity risk as well as techniques for exploring how suppliers may price/mis-price risk in a quoting situation.

In the next post in this series, we'll continue to offer pragmatic advice on commodity risk management, first examining the importance of understanding the accounting implications of certain strategies.

Jason Busch

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