Having managed the procurement, strategic sourcing, and financial risk management of commodities for decades, we have lived the markets. Over those years, we have learned a lot about markets, the way they operate, and the way the companies approach commodity risk management.
The traditional method of commodity procurement and risk management today says that buyers and sellers should be studying the market in question, pulling together supply and demand outlooks, forecasting a price target for buying or selling, and executing coverage – ideally at either the market top or bottom. The only problem is that it doesn’t work!
You see, forecasting commodity markets is a fool’s errand. If any buyer or seller could do it successfully – even 50% of the time – they would be sitting on a beach somewhere counting their money instead of sitting at a desk working for a company. There are simply too many variables in question to successfully predict what’s going to happen in the future. Even if you could nail short term market outlooks, those variables are likely to change before your coverage duration runs up.
So what do we do?
First and foremost, businesses should stop trying to time and predict the market. It is simply impossible. To successfully implement a long lasting commodity risk management process, businesses need to processes and systems to enable their success.
Second, you need to align your commodity strategy to your business objectives. Is your primary goal to meet/beat a predetermined budget? Is your primary goal to to have an average price that is close to the market? Those are two very different approaches to risk management and should be treated as such. How about you risk tolerance?
Third, you need to determine how you are going to achieve those goals. Are you going to flat price through the ultimate buyer/seller? Are you going to use futures and options? What is your risk tolerance? Again, those are all very different approaches and should be treated as such.
What we specialize in is creating tailored commodity procurement and risk management strategies that align to your business goals and objectives. We work very hard to understand your objectives, to develop a plan of action that works to achieve them, and to ensure that there is confidence in the results.
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