Volatility in commodities markets can affect a company's financial performance in both positive and negative ways, Brown says, although "the negative ones tend to outweigh the positive." When raw materials make up a large portion of the cost of goods sold on key items, a manufacturer can be in for some tough times if it doesn't manage its supply chain properly.
Companies need to understand what they "cannot afford to have happen." Then they need to take a number of steps to address the issue of commodity exposure. First is "understanding what your own business model is." Such an exercise will uncover major risks as well as strategies available for hedging on supply and pricing. It will also identify various government policies that can have an impact on the flow of goods and raw materials.
Hedging programs can be valuable, but they carry their own set of risks. "It comes down to a company's financial backbone," says Brown. "Are you willing to take on inconveniences?" They include the need to comply with strict accounting rules for those engaging in derivatives trading.
Another possible solution is to diversify sourcing, but that's not always possible. "As you look through what your options are," Brown says, "sometimes there's only one." Those are the cases where a company must determine what it can't afford to see happen, and make sure to minimize the potential for disruptions in supply.
Brown sees "a paradigm shift" taking place in commodity risk management over the past five to six years. A growing global population and evolving middle class are having a big effect on demand, he says. A small shift in price or availability of basic items such as grain - not to mention an incremental rise in oil prices - can have a huge impact on one's ability to serve markets profitably.
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Keywords: supply chain, supply chain management, supply chain risk management, sourcing solutions, supply chain planning, inventory management, inventory control
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