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Commodity risk management

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Winning solution to help a consumer durable goods company manage procurement cost variations by using commodity risk management

Winning solution to help a consumer durable goods company manage procurement cost variations by using commodity risk management

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  • 1. Whirlpool- IDEATE 2009
    Managing Uncertainties in Procurement Costs
    Department of Management Studies, IIT Delhi
    Team Name: NinePointSomeone
  • 2. Contents
    • Objective
    • 3. Our approach
    • 4. Assumptions used
    • 5. Classification of demand
    • 6. Model used
    • 7. Simulation results for each commodity
    • 8. Simulation for currency
    • 9. Advantages of approach (Savings, Certainty Equivalent Factor)
    • 10. Model Vs Normal hedging
    • 11. How to do it in real world
    • 12. Legal guidelines
    • 13. Benchmarking Industry Standards (LG, Samsung)
  • Objective
    1
    2
    3
    Hedge against the commodity price fluctuations in way to stay ahead of competition.
    Convert the threat of commodity risk into an opportunity
    Simulate a business plan using real data
  • 14. Assumptions Used
  • 15. Our Approach
  • 16. Block Diagram
    Classification of Demand
    SEASONAL
    UNCERTAIN
    BASE
    demand Which is
    there less than 80%
    but more than 30%
    of the year
    (30-40% of
    specified goods)
    Predictable
    Which is there for
    less than 30 % in an
    Year
    (0-10 % of
    specified goods)
    Uncertain
    Demand which is there more than 80% of times.
    (50-60 % of
    Specified goods)
    Known in advance
  • 17. Model Methodology
    Base Demand Model
    Please see the Excel sheet enclosed for details
  • 18. Marketing Diagram
    Offset
    Profit/Loss
    Problem for Seasonal Demand
    Develop a model to fix the timing of future contracts
    Hence previous strategy will not serve objective.
    Demand
    No offsetting of
    losses possible.
    Demand is not
    round the year
    Futures loss/ gain
    will occur every month
  • 19. Diagram
    Calculate the Moving Price Average of Last 5 months.
    MPA
    Model predicts that prices are going to rise
    MPA < Spot
    MPA>Spot
    Seasonal demand Model
    • Commodity Technical Analysis
    Model predicts that prices are going to fall
  • 20. Model strategy- Seasonal Demand
    Please see the Excel sheet enclosed for details
  • 21. Uncertain Demand
    Highly sporadic in nature
    Quantity needed is low
    Can be purchased at SPOT from the market.
    An Extra Quantity contract with Suppliers
    Make contract at today’s price
    Pay them a high margin
    Demand will be short and uncertain
  • 22. Simulation Results- Aluminum
  • 23. Aluminum - Seasonal Demand
  • 24. Consolidated Demand-Aluminum
  • 25. Advantages of the Model
  • 26. Copper Base Demand
  • 27. Copper Seasonal Demand
  • 28. Cost Savings for Copper due to the Model
  • 29. Copper Hedging- Advantages
  • 30. Simulation- steelBase Demand
  • 31. Steel – Seasonal Demand
  • 32. Overall Demand
  • 33. Steel Advantages
  • 34. Total cost in Rupees of ALL commodities Vs SPOT
    Please see the enclosed excel for details
  • 35. Savings Using Our Model
  • 36. Overall Inferences (All Commodities Hedging with Currency Futures)
    • During the period of 15 months under consideration
    • 37. The cost of purchase using the model is less than the spot cost of purchase in every single month (100% accuracy of the model)
    • 38. Significant Cost Reduction to the tune of Rs. 853.11 crore over the period resulting in Savings of Rs. 57 crore per month
  • Diagram
    Advantages of a mixed model
    • This will keep us ahead of competition at all points in time
    • 39. Our procurement cost would be supplier independent
    • 40. Adaptability
    During a price decline
    we are able to follow the Spot Curve
    During a Price rise we can
    hedge using Futures contract
  • 41. Proposed Model Vs Normal Hedging
  • 42. How to practice in Real world…
    Indian Team
    (Using Primary Surveys of Commodity Traders)
    Sharekhan has least commission of 0.03%.
    Daily Trading in commodity futures contract
    Central Procurement team
    London metal Exchange trades in all commodities
    Payment mode is $
  • 43. RBI Guidelines for commodity futures trading in india
    After negotiations their commission is 0.03%
  • 44. Present Practices in Procurement Risk Management Vs Our Modelling
    Just like Whirlpool
    This will effect their bottom-line, Our model prevents that
    LG India
    Direct trading at
    Market decided prices
    They Predict,
    not hedge, so a risk is there
    We already have a
    Hedging team
  • 45. Thank You !
  • 46. References
    LG India: MrShrivastava, SCM head
    LG India: MR Saurabh, Procurement team
    Sharekhan: MrChetan & Mr Deepak
    Bharti - Walmart: Mr Anil Bahl Senior VP, Logistics
    MCX: Mr Joseph
    LME