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Managing Commodity Risk

Author(s):

CAPS Research

April 2012, Inside Supply Management^® Vol. 23, No. 3, page 32

CAPS Research: Promoting Supply Management's Best Practices
Companies score their level of risk management around commodity pricing and availability, with some surprising results.

CAPS Research recently asked its community of chief procurement officers and a group of benchmarking contacts at different companies to report how well they manage risks associated with commodities and raw materials that are subject to volatile prices and sporadic availability. The survey participants were asked to score their responses to six different statements on a seven-point scale indicating whether they strongly agree (scale = 7) or strongly disagree (scale = 1) with each statement. Data corresponding to the summary responses to each statement were sorted by the scaled responses (from high to low) against the first statement.

Note that some companies may not be purchasing these commodities directly, but they may be purchasing different products, parts and/or components that consume these commodities one, two or more tiers up the supply chain.

Survey Statements and Responses

The survey population, composed of such industry sectors as aerospace and defense, industrial manufacturing, healthcare products, metals and mining, transportation and consumer packaged goods, among others, was asked to respond to each of the following six statements.

Statement one: We have identified commodities with volatile prices and/or availability that may have a significant impact on our product and profit plans.

Summary: Nearly three-fourths (74.3 percent) of the survey participants reported they "strongly agree" (scale of 7 or 6) and the remaining 25.7 percent reported a scaled response of 5, 4 or 3. None of the participants reported they "strongly disagree" (scaled response of either 2 or 1) with this statement.

If the participants reported they identified the volatile commodities, the survey asked if they purchased these commodities directly for input to the manufacturing process, or if they purchased products, parts and other components that have consumed the volatile commodities.

About two-thirds of the survey participants reported they purchase commodities for direct input; and more than 80 percent reported they purchase products, parts and the like that have consumed the commodities. Overall, 54 percent reported they buy the volatile commodities directly for manufacturing, and they buy products, parts and the like that include these commodities.

Statement two: We have an effective commodity risk management program/process in place with clearly defined procedures and goals to manage the impact of volatile commodity prices and availability on product and profit plans.

Summary: The survey participants who "strongly agreed" with statement one are more likely to "strongly agree" or "agree" with this statement than the participants who scored statement one with a 5 or below. The average scaled response for those who scored the first statement as a 6 or 7 was 5. The average scaled response for those who scored the first statement as a 5 or below was 3. The companies that reported they have identified commodities with volatile prices and/or availability are the most likely companies to have an effective commodity risk management program or process in place.

Statement three: We regularly employ external sources of information to track commodity availability and pricing trends.

Summary: Only 6 percent of the survey participants reported they "strongly disagree" with this statement, meaning they do not employ external sources to regularly track volatile commodities. Nearly 71 percent of the participants reported they "strongly agree," indicating that most participants do track commodity availability and pricing trends through external sources.

Statement four: We have cost models in place to forecast the impact of changing commodity prices on the total component cost and/or to the total cost of our finished goods/products (for example, the cost of copper in a printed circuit board or the cost of sugar in food products), or on our operating costs.

Statement five: We have sourcing strategies in place to mitigate short-term shortages of key commodities or to take advantage of short-term oversupply of key commodities.

Summary: There is a strong correlation between the survey's statement four (forecasting cost models are in place) and statement five (sourcing strategies are in place to mitigate short-term shortages).

Generally, the survey participants who scored their responses to statement four as 5, 6 or 7 likely scored their response to statement five in a similar fashion. As noted next, most of the survey participants reported they use both cost models to forecast changing commodity prices and sourcing strategies to mitigate short-term shortages of key commodities.

Statement six: We are generally satisfied with our efforts to manage risk around commodity price and availability volatility.

Summary: Although the survey scores for statement one show that about 75 percent of survey participants have identified commodities with volatile prices and/or availability, only 45 percent of that survey population reported they are generally satisfied with their efforts to manage risk around commodity price and availability volatility.

CAPS Research and the benchmarking team would like to express their appreciation to the companies that participated in the survey Risk Management Strategies for Commodities with Volatile Price and Availability. If you would like more information about this report and CAPS' other benchmarking activities, please send an email to the benchmarking team at metrics@capsresearch.org.

For more information, send an e-mail to author@ism.ws.

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