Commodity Risk Management: Hedging and Non-Hedging Strategies (ISM: Dispatch 3 — Part 1)

On the final morning of ISM, MetalMiner's own Lisa Reisman led off the second-to-last session in the ISM Supply Chain Risk management track with a presentation titled Minimizing Commodity Risk: Practical Hedging and Non-Hedging Strategies for Volatile Commodity Spend. She began by discussing strategies for hedging, even for organizations which have a "very small spend." Then she jumped into three case studies covering how companies are managing commodity risk using a range of approaches:

  • OEMs are dictating the prices suppliers will pay for raw materials (and dictating where they should buy from)
  • Understanding the supply market by examining, in part, how key producers and distributors price their products from the top all the way down to how their pricing strategies impact buying organizations (i.e., exploring the inside line on how large buyers understand their pricing nuances and ways of using caps and collars with indexes)
  • Structuring longer term contracts; bidding value-add and indexing the balance

We'll explore these case studies in more detail in the rest of this series. The first, perhaps, is most telling of a trend that could reshape pricing and commodity risk management in the supply chain (i.e., bigger players calling the shots on what suppliers will pay). Such an approach requires deep spend visibility into underlying material requirements based not just on AP and invoice data, but bill of material information and part forecasts.

Speaking at ISM on the final day (a Wednesday) is always a bit of a mixed affair. I've done it twice. On the final morning, the groups are smaller and the energy levels are a bit down. But the final day always brings with it the stalwart attendees who are really keen to learn about a topic. Hence while the attendance for each session might be lower, the interest levels and questions in the topics is often that much higher. For Lisa's session, there was certainly a significant amount of interest in learning about the topic, although less than 15% of those attending were currently engaged in physical hedging strategies (and <5% in financial hedging).

- Jason Busch

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