How can procurement implement strategies to hedge commodity price risk

Posted by Mintec Team on Feb 13, 2023 9:32:06 AM

Procurement leaders can implement several strategies to hedge against commodity price risk and optimize supplier costs:

  1. Long-Term Contracts: Procurement leaders can negotiate long-term contracts with suppliers, which can provide stability in commodity prices and reduce the cost of procurement. This can also help to build stronger relationships with suppliers, as they will have a better understanding of the company's needs and can plan accordingly.

  2. Forward Contracts: Procurement leaders can use forward contracts to lock in prices for a specific quantity of a commodity to be delivered at a future date. This can help to mitigate the risk of price fluctuations and ensure that the company has a stable supply of the commodity.

  3. Options Contracts: Procurement leaders can also use options contracts, which provide the option to purchase a commodity at a fixed price in the future. This can provide a cost-effective hedge against price fluctuations and ensure that the company has the ability to purchase the commodity at a predetermined price if prices increase.

  4. Diversification: Procurement leaders can diversify their supply chain to reduce their exposure to commodity price risk. This involves sourcing from multiple suppliers and seeking out alternative materials or products that can serve as substitutes.

  5. Collaboration with Suppliers: Procurement leaders can collaborate with suppliers to manage commodity price risk. This can involve sharing information about market trends and collaborating on procurement strategies, such as joint purchasing, to negotiate better prices.

  6. Regular Review and Adjustment: Procurement leaders must regularly review and adjust their strategies to hedge against commodity price risk. This involves monitoring market trends, updating contracts and hedging strategies, and staying informed about new tools and technologies that can help to optimize supplier costs.

Implementing these strategies can help procurement leaders to better manage commodity price risk and optimize supplier costs. 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 the types of hedging strategies available to hedge exposure to commodity price risk to optimise supplier costs.

Topics: Procurement