Managing rough waters

Challenges

Sharp price swings in commodities from coffee to crude oil are creating a significant challenge for businesses trying to manage such fluctuations now and in the future. This can drive uncertainty in company costs, product pricing, earnings and credit availability—factors that can affect a company’s competitiveness. It can also test the abilities of businesses to invest and plan for the future. Price volatility is not only affecting their short-term profitability and performance, but possibly their very survival.

Several forces are at play here. While some commodity price fluctuations are cyclical, other factors—political tensions, natural disasters, and erratic weather events—have contributed to rapid price changes throughout history. More recently, globalization-related issues have complicated the picture. Emerging markets in Asia and South America are creating demand for certain materials, which are hiking prices. Recent threats to downgrade the credit ratings of several European nations have been affecting costs of raw materials. Meanwhile, speculators have also jumped into this mix—they don’t use or produce the raw materials that they trade in, but they can affect commodities markets as they seek profits from the price volatility.

While many organizations understand that volatility is rising and here to stay, few have found effective strategies to weather this day-in, day-out unpredictability. Some avoid doing anything because they think it’s beyond their control to make an impact—but it’s not. In this article, we’ll examine how companies can develop an effective commodity management strategy to mitigate price volatility using several strategies and also potentially profit from it by employing various techniques. Business leaders should understand not only what’s driving these changes, but measure their risk exposure and determine the impact of volatility on their input costs, earnings and working capital. From there, they can develop a commodity management plan using different tactics to help strengthen their position in the market and outperform their competitors.

Opportunities

As industries experience even great commodity price swings, companies should leverage a mix of new pricing and supply management strategies that go beyond traditional methods to lessen the effects of such volatility. More and more, these pricing swings will likely affect a company’s bottom line and its long-term investment strategies.

An effective commodity management strategy is going to take time to develop and implement and, once in place, will need to be constantly monitored and adjusted from a portfolio standpoint. This requires that companies take a deeper look at how their business units and various functions share data and collaborate on strategies. If they’re working in silos, they may not be getting data that could help them make informed choices that are in the company’s overall interest.

Today, you cannot afford to sit back and think these situations are beyond your control. Your company’s very survival may be at stake. Companies that get a head start on managing volatility can gain a competitive advantage, even as markets become uncertain.

Read the full article to learn more about commodity management and to a review a framework to help manage commodity price volatility.