Abstract

Every business is exposed to financial risk stemming from commodity price volatility. Risk exposure may be direct from the prices paid for raw materials transformed into products sold to customers or indirect from higher energy and transportation costs. The purpose of this book is to provide an approach that organizations can implement and adapt for managing commodity price volatility and reducing their exposure to financial risk associated with purchased goods and services. This topic is important for current and future supply chain professionals due to the significant direct financial effects that price volatility has on profitability, organizational cash flow, the ability to competitively price products, new product design, buyer-supplier relationships, and the negotiation process.

Most organizations are exposed to commodity price risk in the purchased products they acquire directly or indirectly through their supply chain operations. For example, risk exposure comes directly from raw materials such as corn, wheat, and soy in the foods that consumers buy from retail stores; various metals such as copper that is processed to make wiring; and petroleum by-products that are the key feedstocks in the plastics used in many products, equipment, and packaging materials. Further, companies are exposed to price volatility indirectly such as from natural gas and electricity used as energy in operations and from diesel fuel for transportation in their distribution networks.

Flexibility, a key competitive weapon for managing supply chains, is likewise essential for managing commodity price risk. This book provides supply chain managers a way to assess their organizations’ exposure to price risk. Based on the extent of risk and their organizations’ risk appetites, supply chain managers can choose from a range of options for effectively managing risk. The book will help supply chain managers to develop and implement effective price risk management strategies. Further, the decisions, actions, and policies taken today can significantly affect the options available for managing commodity price risk in the future. The viability and effectiveness of the overall process and respective techniques are discussed, predominately from the buying firm’s perspective.

Keywords

Commodity analysis, price volatility, risk management, hedging, forecasting, market analysis