Supply Chain and Risk Management: “Taking Advantage of Commodity Volatility”

The second idea that I suggested as part of the ten items in my “what’s next” presentation last Friday at ISM’s Risk Conference in Chicago was “Taking Advantage of Commodity Volatility” as part of broader supplier and supply chain risk management efforts. During my talk, I mentioned how more advanced procurement and supply chain organizations are already starting to build (or have deployed) commodity and supplier management programs as key components of broader initiatives that tackle risk.

As part of these efforts, these organizations are:

  • Investing in the right commodity management systems (and system linkages with ERP, sourcing, etc.)
  • Aggregating the buy (to enable hedging, to buy forward in rising markets, to create more effective budgeting/forecasting, etc.)
  • Bringing in expert analysts to offer commodity perspectives, forecasts, dashboards, etc. These could be independent category experts or firms (e.g., Beroe, SmartCube)
  • Doing statistical modeling for demand planning and forecasting and doing more to correlate factors on the supply side. This includes gathering intelligence and building tools around it (e.g., looking for correlations).
  • Being in constant learning mode about the global supply market, which can include understanding where new sources of supply are coming online (as well as individual supply market dynamics in different regions).
  • Focusing on developing a storyline and perspective about the unexpected (e.g., large temporary price swings) rather than simply attributing such moves to underlying volatility.

Commodity management – when it is a separate function – is often independent from supply chain and supplier risk management. It shouldn’t be. At the very least, those focused on commodities (including traders inside companies) should coordinate closely with procurement and risk teams on a highly collaborative basis, including understanding overall commodity exposure in the broader and lower-tier supply chain.

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