A Strategy for Managing Commodity Price Risk
Just about every organization is exposed to price changes associated with the commodities they acquire for their operations. These price movements can detrimentally affect profitability, budgeting, cash flow, and overall organizational performance. This article puts forth a flexible process that companies can implement to manage commodity price volatility.
As the global economy improves, managers are faced with increasing prices and greater price volatility for key materials and components, energy, and transportation across their supply chains. This article, which is a summary of our recently published book titled Managing Commodity Price Risk: A Supply Chain Perspective (Business Expert Press), describes a flexible approach for managing financial risk from commodity price volatility. When commodity prices are volatile, business decisions associated with developing budgets and profit projections, setting prices, deciding when and how much to buy, and negotiating contracts become all the more challenging.
The wrong decisions can cut into profit margins, reduce cash flows, and damage relationships with suppliers and customers. To cite one example, in 2011 Kimberly-Clark saw its profits and sales drop due in part to higher than- expected prices for wood pulp.1 As a result, the consumer products company was forced to raise prices on diapers, a product category experiencing declining sales and increasing competition from store brands.
Commodities are goods that are not differentiated in the marketplace such as metals, energy, and agricultural products. Commodity prices are influenced by supply and demand as well as by trading and speculation; thus, they can be highly volatile. To illustrate, from August 2003 to March 2004, world soybean prices rose from $237 to $413 per ton, an increase of 74 percent. They then fell back down to $256 over the next 24 months. More recently, silver was trading at around $18 per ounce in April and May of 2010. Less than a year later, silver almost tripled in value to $49 per ounce during the final week of April 2011.2 As global economic development increases the worldwide demand for commodities (many of which have a limited supply), prices and volatility will likely continue to increase.
This complete article is available to subscribers
only. Click on Log In Now at the top of this article for full access. Or, Start your PLUS+ subscription for instant access. |
Not ready to subscribe, but need this article?
Buy the complete article now. Only $20.00. Instant PDF Download.
Access the complete issue of Supply Chain Management Review magazine featuring
this article including every word, chart and table exactly as it appeared in the magazine.
Latest News
Port of Baltimore May Not Reopen Until Summer Sales & Operations Planning (S&OP) Mastery A New Priority Greets Procurement Professionals in 2024 Cargo Shipping Remains on Hold in Baltimore Following Bridge Collapse Maximizing the Bottom Line: The Power of Procurement More NewsLatest Resource
Sales & Operations Planning (S&OP) Mastery In this Special Digital Edition of Supply Chain Management Review, you will find insights on the importance of sales and operations planning (S&OP) to an organization’s bottom line.All Resources
Download Article PDF |
As the global economy improves, managers are faced with increasing prices and greater price volatility for key materials and components, energy, and transportation across their supply chains. This article, which is a summary of our recently published book titled Managing Commodity Price Risk: A Supply Chain Perspective (Business Expert Press), describes a flexible approach for managing financial risk from commodity price volatility. When commodity prices are volatile, business decisions associated with developing budgets and profit projections, setting prices, deciding when and how much to buy, and negotiating contracts become all the more challenging.
The wrong decisions can cut into profit margins, reduce cash flows, and damage relationships with suppliers and customers. To cite one example, in 2011 Kimberly-Clark saw its profits and sales drop due in part to higher than- expected prices for wood pulp.1 As a result, the consumer products company was forced to raise prices on diapers, a product category experiencing declining sales and increasing competition from store brands.
Commodities are goods that are not differentiated in the marketplace such as metals, energy, and agricultural products. Commodity prices are influenced by supply and demand as well as by trading and speculation; thus, they can be highly volatile. To illustrate, from August 2003 to March 2004, world soybean prices rose from $237 to $413 per ton, an increase of 74 percent. They then fell back down to $256 over the next 24 months. More recently, silver was trading at around $18 per ounce in April and May of 2010. Less than a year later, silver almost tripled in value to $49 per ounce during the final week of April 2011.2 As global economic development increases the worldwide demand for commodities (many of which have a limited supply), prices and volatility will likely continue to increase.
SUBSCRIBERS: Click here to download PDF of the full article. |
Subscribe to Supply Chain Management Review Magazine!
Subscribe today. Don't Miss Out!Get in-depth coverage from industry experts with proven techniques for cutting supply chain costs and case studies in supply chain best practices.
Start Your Subscription Today!
It’s high time to go beyond visibility Driving supply chain flexibility in an uncertain and volatile world View More From this Issue