What are the best price hedging strategies availabe for procurement teams in order to manage their suppliers' costs for commodity raw materials used in private label and branded finished products?
There are several price hedging strategies, using price forecasts, that procurement teams can use to manage the costs of commodity raw materials used in private label and branded finished products:
Forward Contracts: Forward contracts are agreements between the procurement team and a supplier to purchase a specific quantity of a commodity at a fixed price for delivery at a future date. This can help the procurement team lock in prices and reduce exposure to price volatility.
Options Contracts: Options contracts provide the procurement team with the option to purchase a specific quantity of a commodity at a fixed price for delivery at a future date. If prices for the commodity increase, the procurement team can exercise the option to purchase at the lower price, thereby reducing their exposure to price volatility.
Futures Contracts: Futures contracts are similar to forward contracts, but they are traded on a commodities exchange. Procurement teams can use futures contracts to lock in prices for delivery of a commodity at a future date, thereby reducing their exposure to price volatility.
Supply Chain Diversification: Procurement teams can reduce their exposure to price volatility by diversifying their supply chain. This can involve sourcing from multiple suppliers, seeking out alternative materials or products, or exploring different regions for raw materials.
Collaboration with Suppliers: Procurement teams can collaborate with suppliers to manage price volatility. This can involve sharing information about market trends, negotiating long-term contracts, or working together to negotiate better prices with suppliers.
Price Monitoring and Review: Procurement teams should regularly monitor commodity prices and adjust their strategies as needed. This can involve tracking price trends, negotiating new contracts, and updating hedging strategies to ensure they are aligned with the company's goals and market conditions.
By using a combination of these strategies, procurement teams can effectively manage their suppliers' costs for commodity raw materials, reducing their exposure to price volatility and optimizing their supply chain. However, it is important to approach each strategy with a clear understanding of the company's needs and priorities, and to work closely with suppliers and other stakeholders to achieve the best possible outcome.
Mintec Analytics combined with its price forecasting and heding advice, provides extensive commodity market intelligence and price insight to enable businesses to control their costs better, reduce exposure to price risk and drive efficencies across their buying teams.
Learn more about how procurement leaders implement strategies to hedge their exposure to commodity price risk to optimise supplier costs.