Thinking Through Global Commodity Risk

Kudos to Knowledge at Wharton, an online publication that does not require registration, for continuing with their excellent series on global sourcing. In their latest installment, the editors along with BCG tackle the concept of global commodity risk, examining how companies can create strategies to mitigate and manage risk. Spend Matters readers no doubt know that supply risk is a subject that I tackle with significant frequency on these pages. But Knowledge at Wharton and BCG together has much to add to what I've discussed on these virtual pages in the past. In particular, I like their practical advice for pursuing commodity risk management and risk mitigation approaches.

For example, I like the notion of picking a specific exposure number as the cut-off point to get serious about investing in commodity price volatility (BCG suggests 10%). But the one caveat here is that an organization must be able to quantify and model potential risk (e.g., how many companies forecast the possibility of $150 / oil 12 months ago?) Shortcomings like this aside, the concept makes sense. From a tactical advice perspective, BCG suggests that not all strategies for dealing with commodity price volatility are cut and dry. Take hedging, for example: "If it's done without a lot of thought it's really gambling." Rather, BCG suggests in the article that companies should look at hedging as simply an insurance policy, albeit one that has broad support and organizational involvement. In BCG's words, "a hedging program really requires a cross-functional approach. It requires senior management attention and careful thought around the accounting requirements to make sure that no one gets into any questions with the SEC."

- Jason Busch