New Research: Minimize Volatility With Advanced Commodity Management and Hedging

We're excited to announce the publication of a New Spend Matters Compass Report today: Minimizing Commodity Volatility Through Advanced Commodity Management and Hedging Approaches. Authored by Jason Busch of Spend Matters and Lisa Reisman of MetalMiner (with additional commentary from Brad Clark), the paper provides essential background on a topic of increasing interest to procurement, supply chain and finance organizations. Readers should note that Spend Matters and MetalMiner also recently took a look at specific commodity management technology approaches and requirements in the research brief: Beyond Sourcing and Supply Chain: Commodity Management Solution Fundamentals. The brief which published today, Minimizing Commodity Volatility Through Advanced Commodity Management and Hedging Approaches, serves as a companion to this previous paper.

It's the authors' view that effective commodity management often requires an entirely new model to thinking and engaging suppliers. Such an approach is something that procurement organizations across the discrete manufacturing, food, CPG and energy markets must increasingly master if they're to deliver the type of value that management teams are expecting. In contrast, successfully reducing maverick buying and improving spend compliance, while valuable, represents a fraction of the type of potential savings and risk exposure that focusing on the direct supply chain through commodity management programs can have.

Yet despite the opportunity, it's our belief that only a fraction of procurement and supply chain organizations are ready for the broader commodity management challenge (especially in discrete manufacturing -- A&D, automotive, industrial, etc.). Preparing to jump the commodity risk management hurdle is not easy. Organizations must have the right combination of skills, technology, and market information to manage and act on information and contracts. Moreover, commodity management efforts should drive even more fundamental sourcing strategies than this, starting with a plan to develop basic visibility -- ideally, multi-tier visibility -- into commodity risk exposure.

This Compass research paper explores the capabilities (including knowledge, process, skills, and technology) that organizations need to better manage volatility across their spend portfolios primarily on the base materials/ingredients level including raw material spend "owned" by suppliers. It provides a foundational background on commodity pricing and risk assumption models (e.g., customers, buying organization, suppliers, third-party), forward contracts, futures, swaps, options, and ETFs.

The analysis also considers related spend analysis, demand aggregation strategies, direct materials sourcing strategies and supplier contracting models to minimize risk -- all from a procurement and supply chain perspective.

If your organization has asked itself any of the following types of questions -- or tried to comparatively assess and benchmark itself relative to peers in these and related areas -- then you are an ideal candidate to read this paper:

  • How do commodity management strategies integrate with strategic sourcing programs and supplier management?
  • Have we considered demand aggregation at different levels of the supply chain?
  • Do we have a "no hedge" strategy? If so, why?
  • How do we define "hedging" as an organization? If there is a price premium for a longer-term contract lock with a supplier buying material that goes into what we purchase from them, is that a hedge?
  • Do we have the right skill set in procurement to address hedging and trading requirements?
  • Do we understand the nuances of systems integration to make sure that if we engage in such activity, that we "cover" enough of our exposure but not too much?
  • Do we want to invest the time to develop forecasts and perspectives on key categories/commodities for our companies to actively take positions informed by where we believe the market is headed? Or are we more comfortable with the basic taking of risk of the table regardless of what forecasts might suggest?

If these questions have piqued your interest, we encourage you to download this Spend Matters Compass report: Minimizing Commodity Volatility Through Advanced Commodity Management and Hedging Approaches along with its companion paper: Beyond Sourcing and Supply Chain: Commodity Management Solution Fundamentals. While the former provides an essential primer on key topics, ideas and concepts related to commodity management and direct materials sourcing strategy, the latter takes a closer look at how companies are actually deploying specific commodity management solutions and technology in terms of process and function while also providing greater context on the overall direction and business trends driving commodity market volatility.

- Jason Busch

Share on Procurious

Discuss this:

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.