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Commodity Prices: High and Volatile

Finance chiefs are contending with increasingly unpredictable prices for raw materials.

Sarah Johnson, | US
March 1, 2011

Beyond the Hedge

Great article. We're trying to be creative in dealing with it and I actually just took part in an interesting survey that had a good list of tactics (that I copied here below)... study is at The bigger issue it highlights is how do we get smarter about dealing with this volatility more systematically rather than constantly reacting. How do you build the business case that is built primarily on the "option value" of such agility - especially relative to other "hard ROI" programs. Thoughts? Hedging strategy laundry list - beyond long-term agreements and physical hedging: *Finding alternate supply sources of similar items/services *Passing on price increases intelligently to customers or reducing/shifting customer demand *Reducing supply needs through specification changes, yield improvements, mix shift, etc. *Fighting price increases by trading non-price items (terms, volumes, goodwill) *Aggregate purchases of cost-inflated items and/or adjacent spend areas *Cutting costs, budgets, and investments in other business spending areas *Financial hedging beyond long-term contracts (e.g., price smoothing / capping) *Currency hedging on international purchases (e.g., source in local currency) *Using price/cost intelligence to support negotiations against undue supplier price increases *Help suppliers mitigate their price/availability risk ? and then share in the gains *Vertical integration *Rigorous input price/cost forecasting processes *Scenario-based pro-forma business planning process (integrating price forecasts) *Clear direction and strategy/policy for guiding all hedging decisions *Use of Centers of Excellence, specialized analytics and third-party services

Posted by Pierre Mitchell | March 02, 2011 09:24 am

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