Despite a series of events over the past few years - volatile commodity prices, supplier bankruptcies and natural disasters such as the Icelandic volcanic ash cloud - the perception that procurement professionals still aren't taking supply chain risk management seriously enough lingers. One reason, of course, is that during difficult economic times many organisations have concentrated on short-term cost-cutting and cash flow - righting the ship, as it were, rather than worrying about its future direction and factors that might throw it off course.
So it's always encouraging to witness minds and energies being channelled to manage risk more effectively and proactively. Last week I attended (and helped to facilitate) a very interesting one-day conference in Copenhagen on strategic commodity risk management organised by the Danish Purchasing and Logistics Forum (DILF) and Kairos Commodities, a specialist research and analyst unit. Although the audience was quite small - about 40 people from Scandinavia, Germany and the UK - their interest in learning about some of the key methodologies now being applied in the commodity buying arena (some of them quite mathematically orientated) was commendable.
However, the results of a new survey among 300 European companies presented at the start of the conference showed that there is still some way to go before techniques such as "Value at Risk" (VaR) are applied in practice to enable well-informed decision-making to take place across major commodity spend areas. Almost two-thirds of companies did not have an enterprise-wide risk strategy, while 45% of purchasing departments did not have a strategy for tackling commodity risk.
The study's authors concluded that:
- Too much commodity risk is handled at the category, rather than portfolio, level.
- There is insufficient communication and co-ordination between procurement, finance and sales.
- Only a minority of companies hedge risk through the financial markets.
- Procurement departments generally lead on commodity risk, but they are understaffed.
- There is a limited understanding of the cost drivers behind major categories.
- Even when this knowledge exists, fact-based negotiations are not used sufficiently.
- Only half of companies have quantified the effect of commodity price fluctuations on their bottom lines.
- Renegotiations of commodity contracts typically take place at fixed intervals, rather than being driven by market analysis.
Overall, the message was that although commodity prices are likely to remain volatile, "commodity risk is not hot - yet".
Some companies are pushing ahead on commodity risk management - Diageo, the drinks giant, and Danfoss, a Danish industrial group, were two that shared details of their approaches at the conference. But the evidence suggests that there's a lot more work to be done over the next few years if procurement is to play a truly strategic role in this area.