Creating Value at the Intersection of Sourcing, Hedging & Trading

14 Pages Posted: 4 Nov 2011

See all articles by Justin Pettit

Justin Pettit

Independent

Blaine Finley

affiliation not provided to SSRN

Date Written: December 1, 2011

Abstract

Higher commodity prices, and higher currency and commodity price volatility have combined with challenging economic circumstances to make for very challenging economics within many industries today. These factors introduce risk to both top line revenue as well as the cost structure to wreak havoc on net cash flow and profitability, if left unmanaged. We expect high prices and increased volatility to continue in many global commodity categories. This culmination of headwinds puts both sourcing and hedging near the top of the strategic agenda for many companies.

Many companies already anchor their hedging (and sometimes sourcing) processes around goals of reducing cash flow volatility and optimizing value (versus simply minimizing sourced or manufactured unit cost). Nevertheless, many have expressed an interest in a more systematic approach to risk management, and developing a combined sourcing-hedging policy.

Rising pressure for growth and profitability has also led companies with large commodities exposures – both those who are naturally long and those with a natural short – to explore a greater presence around commodity hedging and trading, as well as the use of innovative risk-shifting mechanisms on inbound and outbound material flows. For many companies, this must involve the expertise and capabilities of, as well as coordination across, the Purchasing, Treasury, Selling and Marketing organizations.

Keywords: Procurement, Sourcing, Hedging, Trading, Risk Management, Strategy, Financial Strategy

JEL Classification: G3, G30, L22, M1, M2

Suggested Citation

Pettit, Justin and Finley, Blaine, Creating Value at the Intersection of Sourcing, Hedging & Trading (December 1, 2011). Available at SSRN: https://ssrn.com/abstract=1953424 or http://dx.doi.org/10.2139/ssrn.1953424

Justin Pettit (Contact Author)

Independent ( email )

United States
9146092011 (Phone)

Blaine Finley

affiliation not provided to SSRN

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