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

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Commodity risk management

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