Before the economic crisis, raw material prices knew only one direction: upwards. Since 2008 the situation has changed. No one can predict in which direction raw material prices will go. They rise and fall with a strong irregularity and without any discernible pattern. This increasing market volatility, added to the permanent competitive financial pressures, results in making difficulties in mitigating commodity and currency price risks. And inaction is the riskiest response to the uncertainties.
RAW MATERIAL RISK MANAGEMENT BY TALA CONSULT
Through its Raw Material Risk Management services TALA Consult assists its clients to systematically protect their fundamentals by managing dynamically and efficiently the financial risks linked to market volatility and reach several targets:
Protect margins: cover the company margins while facing pricing pressure
Increase competitiveness: protect market shares against competition
Secure budgets: ensure predictable and profitable future to share holders and eliminate unwelcome surprises
Differentiate your product: make your product different by offering an optimized pricing structure.
Our projects answer to a global and sustainable risk management approach.
Which department is involved in a risk management project?
Traditionally, commodity price risks are managed by the purchasing departments through their procurement strategy and sometimes at an operating units level (plants, factories). In this case, managing exposures primarily on usage volumes and notional amounts is common.But this approach leads to applying short-term strategies and coverage strategies when the company needs a sustainable approach to satisfy its long-term targets. This is the reason why our market risk management projects involve three key departments: Purchasing, Sales and Finance.
Which are the typical mitigation strategies available ?
There is not one unique solution to cover the risk but the different alternatives can be grouped into four levers:
- Margins Management: manage profitability through price changes and raw material price transfer to customers.
- Procurement strategies: control purchasing costs through long-term agreement and fixed prices with suppliers or anticipate purchasing volumes and store the raw material.
- Hedging: transfer the price risk to third parties with financial instruments (futures, swaps, option and other instruments) to manage the residual exposure.
- Strategic management: innovate and modify the marketing mix by developing products with a lower ratio risk vs margin. Invest on upstream or downstream businesses (e.g. invest on corn production for a stark manufacturer).
TALA consult can also provide your organization with customized training and coaching regarding commodity and currencies risk management. Please contact us for further information.