Cost elements associated with commodity purchases using various commodity price risk mitigation approaches
| Strategy | Sourcing approaches | Contracting approaches | Financing approaches | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Cost component | Forward buying | Switching supplier | Substituting commodity | Vertically integrating | Inserting escalation clauses | Staggering contracts | Passing price increase to customers | Financial hedging | Cross-hedging | |
| Pre-transaction components | Assessing the feasibility of using the commodity (e.g. perishability) | Supplier search | Innovative design with multiple materials (R&D involvement) | Assessing vertical integration alternatives | Negotiating the contractual terms (e.g. frequency of price adjustment, base cost/price, price corridor) | Negotiating the (multiple) contract terms | Customer approval for using a different commodity | Maintaining margin in account | Maintaining margin in account | |
| Continuous price monitoring | Supplier evaluation | Testing facilities | Integrating the distribution channel (i.e. relationship-specific investments) | (Multiple) contracting | Negotiating the contract terms | Monitoring | Monitoring | |||
| Build up (extra) storage capacity and handling capability | Supplier qualification | Commodity (long-term) validation | Obtaining customer approval for using different commodity | Adding new supplier to internal systems (e.g. ERP platform) | ||||||
| Educating new supplier in firm's strategies and operations | ||||||||||
| Transaction components | Purchase price | Purchase price | Purchase price | Purchase price | Purchase price | Purchase price | Purchase price | Purchase price | ||
| Order placement | Order placement | Order placement | Order placement | Order placement | Order placement | Short term cash outlay | Short- term cash outlay | |||
| Delivery/transportation | Delivery/transportation | Delivery/transportation | Delivery/transportation | Delivery/transportation | Delivery/transportation | Broker fees | Broker fees | |||
| Tariffs/duties | Tariffs/duties | Tariffs/duties | Tariffs/duties | Tariffs/duties | Tariffs/duties | |||||
| Inspection | Inspection | Inspection | Inspection | Inspection | Inspection | Inspection | ||||
| Return of non-compliant materials | Return of non-compliant materials | Return of non-compliant materials | Return of non-compliant materials | Return of non-compliant materials | Return of non-compliant material s | Follow-up and corrections | Follow-up and corrections | |||
| Follow-up and corrections | Supplier switching (change management): | Commodity switching (change management): | Follow-up and corrections | Follow-up and corrections | Follow-up and corrections | |||||
| (1) set up adjustments for the production equipment | (1) set up adjustments for the production equipment | |||||||||
| (2) handling costs to operate and clean equipment and load the new material | (2) handling costs to operate and clean equipment and load the new material | |||||||||
| (3) extra warehousing space to store the second material | (3) extra warehousing space to store the second material | |||||||||
| Post-transaction components | Monitoring increased inventory levels | Damages to supplier relationships | Customer goodwill/reputation of firm | Managing the integrated channel | Administrative activities of maki ng price changes | (Multiple) contract management | Administrative activities of making price changes | Foregone profit from favorable price fluctuations | Foregone profit from favorable price fluctuations | |
| Inventory capital costs | Communication/maintaining a (long term) relationship with suppliers | Damage to customer relationships and reputation of firm | Monitoring | Monitoring | ||||||
| Risk/cost of scrap (obsolescence) | Contract management | |||||||||
| Sourcing approaches | Contracting approaches | Financing approaches | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Forward buying | Switching supplier | Substituting commodity | Vertically integrating | Inserting escalation clauses | Staggering contracts | Passing price increase to customers | Financial hedging | Cross-hedging | ||
| (1) set up adjustments for the production equipment | (1) set up adjustments for the production equipment | |||||||||
| (2) handling costs to operate and clean equipment and load the new material | (2) handling costs to operate and clean equipment and load the new material | |||||||||
| (3) extra warehousing space to store the second material | (3) extra warehousing space to store the second material | |||||||||
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