Managing Commodity Volatility

Managing Volatility

Should we hedge? Should we reschedule finished part purchases to avoid what appear to be short-term spikes in commodity prices? Is now the time to negotiate long-terms agreements and firm/fixed prices or should we purchase on the spot market? How do we mitigate the impact of fluctuating raw material prices?

These are questions that manufacturing executives from many industry sectors continue to struggle with as their supply chains become more complex and globally distributed. The decisions on how to manage commodity volatility are no longer limited to enterprise, but have far reaching implications that resonate throughout the extended value chain.

Considerations

Raw materials and various component parts (fasteners, electronic components, etc.) contribute anywhere between 30 to 60 percent of the cost of a finished part. This represents a significant risk factor that can directly impact revenue and earnings certainty. It would be safe to say that today most OEMs could not forecast raw material demand across their extended supply chains. The data no longer resides in any one system or with any one supplier, but is distributed across multiple enterprises and disparate systems. This makes for a difficult problem to solve. How to quantify and manage risk when you don’t have visibility to the detail? While there is no silver bullet to perfectly anticipate and manage common material purchases across an extended supply chain, there are emerging strategies and solutions that allow companies to (1) understand the size and make-up of their exposure and (2) mitigate their exposure

Network Demand Aggregation

One such strategy and solution begins with aggregating raw material demand for internal and externally sourced volume (based upon manufactured parts, irrespective of whether those parts are made in-house or by external contract manufacturers). With the ability to decompose materials into the elemental inputs on a time phased consumption basis, analysis and aggregate views support the use of financial hedging instruments for terminally traded (CME, LME, etc) commodities such as Copper (Cu). While not the only option enabled by aggregating raw material demand, hedging can establish a level of predictability and continuity of supply not otherwise visible in most OEM supply chains.