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Quantifying Sourcing Risk:
Building Commodity Risk Ratings to Mitigate Geopolitical Uncertainty,
Commodity Volatility, and...
Copyright © 2013 IHS Inc. All Rights Reserved.
Before We Get Started
• Ask questions any time
• Type questions into the “A...
Copyright © 2013 IHS Inc. All Rights Reserved.
Live Tweet today’s
webcast:
#IHSWebcast
3
Join the Conversation:
Follow @IH...
Copyright © 2013 IHS Inc. All Rights Reserved.
4
We Want Your Feedback on Today’s Topics
Copyright © 2013 IHS Inc. All Rights Reserved.
5
Today’s Speakers
Rory King
Director, Global Product Marketing, IHS
Rory ...
Copyright © 2013 IHS Inc. All Rights Reserved.
6
Today’s Speakers
Paul Robinson
Senior Economist, Pricing & Purchasing, I...
Conflict Minerals
Regulation
A Look At Geopolitical Disruption
to Supply & Demand Equilibrium
Rory King
Director, IHS Supp...
© 2013 IHS
Four conflict mineral commodities are regulated
• “Conflict minerals” are
pervasively-used commodities
• Tin
• ...
© 2013 IHS
Regulations are contested… will that matter?
• Unrelenting social pressure
• NGO and consumers
• Ongoing regula...
© 2013 IHS
Where is industry at? Roughly 25% of electronic
components have conflict-free disclosures today
10
Source: IHS ...
© 2013 IHS
You care because such regulations are
disruptive to supply-demand equilibrium
Innovators
Early Adopters
Early M...
© 2013 IHS
This means a (long) period of instability
due to bifurcation of traditional behaviors
Supply Demand
Product
S1 ...
© 2013 IHS
EU RoHS illustrates how regulations
disrupt component price and availability
Purchase Price: Price variation fa...
© 2013 IHS
You really care because price and
availability impact your ability to meet KPI
• Your top-five most important k...
© 2013 IHS
Beyond regulation, geopolitical risk at the
source correlates with price volatility
15
Source: IHS Economic & C...
© 2013 IHS
In addition to price volatility, geopolitical
issues threaten to disrupt supply chains
Country Risk Forecast: M...
© 2013 IHS
For instance, turmoil in Mali poses a threat
to mining operations and infrastructure
17
Risk forecast
Property ...
© 2013 IHS
So, what about conflict minerals regulation?
Here’s what our audience had to say…
18
Source: Quantifying Risk A...
© 2013 IHS
Conflict minerals are great leadership
opportunity for you and your organization
Commodity influence… What you ...
Quantifying Risk
A Look At Commodity Risk and
Country Risk Interaction
Paul Robinson
Senior Economist, Pricing & Purchasin...
© 2013 IHS 21
About IHS Pricing & Purchasing
The IHS Pricing & Purchasing Service enables supply chain cost savings by pro...
© 2013 IHS 22
Agenda
• Volatility explained: What is it and why does it matter?
• Where have we been: A recent history of ...
© 2013 IHS 23
Agenda
• Volatility explained: What is it and why does it matter?
• Where have we been: A recent history of ...
© 2013 IHS
Volatility Explained
• What is it?
• Variation in price
over time
• How is it measured?
• Standard deviation
• ...
© 2013 IHS 25
Agenda
• Volatility explained: What is it and why does it matter?
• Where have we been: A recent history of ...
© 2013 IHS
Recent History of Volatility
Standard Deviation of MPI
(52-Week Moving Average)
Chicago Board of Options
Exchan...
© 2013 IHS
Volatility Drivers – Micro
• Just in time inventory (JIT)
• Lengthening supply chains
• Example: Japan earthqua...
© 2013 IHS
Volatility Drivers – Macro
• Monetary policy – liquidity
• Exchange rates -
dollarization
• Exchanges (ETFs)/Hi...
© 2013 IHS 29
Agenda
• Volatility explained: What is it and why does it matter?
• Where have we been: A recent history of ...
© 2013 IHS 30
Premise
• A key part of the risks associated with buying a given commodity
is the risk of the country you ar...
© 2013 IHS
Selected Commodities…
Energy
• Oil
• Coal
• Natural Gas
Ferrous Metals
• Iron Ore
Non-Ferrous Metals
• Aluminum...
© 2013 IHS
1. Gather the (Production) Data
Energy
• Oil (IEA)
• Coal (World Coal
Association)
• Natural Gas (IEA)
Ferrous ...
© 2013 IHS
2. Ranking the Largest Producers
33
© 2013 IHS
3. Calculating the Concentration Ratios
• Highly concentrated production is risky in any country
• Capture diff...
© 2013 IHS
4. Developing Country Risk Scores
• Calculate scores for
additional country
specific risks
• IHS Exclusive Anal...
© 2013 IHS
5. Weight Country Risk Ratings by Production
• Simple weighted average of the individual country risk ratings t...
© 2013 IHS
6. Gather the (Price) Data
Energy
• Oil (IMF)
• Coal (IMF)
• Natural Gas (IMF)
Ferrous Metals
• Iron Ore (IMF)
...
© 2013 IHS
7. Calculate Standard Deviations
38
…
...Or just let a computer do it for you
3 Year standard deviation of the ...
© 2013 IHS
8. Interpreting the Results
39
© 2013 IHS
Assessing the Outliers – Natural Gas
Why is natural
gas more volatile
than its scores
show?
•Seasonality
•Diffi...
© 2013 IHS
Assessing the Outliers – Tin
Why is tin less
volatile than its
scores show?
•Hedging (LME)
•Long history
operat...
© 2013 IHS
SURPRISE!
Oil and Copper
Low Risk/Low
Volatility?
•Still volatile, just
not as volatile as
some
•Growing
produc...
© 2013 IHS
Conclusion – This is just the beginning
Improvements:
• Build commodity
risk scores based
on exports, not
produ...
Copyright © 2013 IHS Inc. All Rights Reserved.
Thank you!
Paul Robinson
Senior Economist, Pricing & Purchasing Service
pau...
Copyright © 2013 IHS Inc. All Rights Reserved.
45
IHS Global Commodity Risk Scorecard
*Offer limited to qualified entities...
© 2012, IHS Inc. All Rights Reserved.
Best Practices in Strategic Sourcing & Procurement
Resilient Supply Chains:
How to D...
Copyright © 2013 IHS Inc. All Rights Reserved.
47
We Want Your Feedback on Today’s Topics
Copyright © 2013 IHS Inc. All Rights Reserved.
For More Information
Send questions and requests for information to:
Webcas...
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Quantifying Sourcing Risk: Building Commodity Risk Ratings to Mitigate Geopolitical Uncertainty, Commodity Volatility, and Conflict Minerals Risk

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Do you know the drivers of commodity volatility? Do you know the impact of conflict minerals regulations on supply and demand?

Commodity volatility and materials risk have plagued buyers in recent years, and today’s volatility is felt throughout the supply chain to a greater degree and at a greater speed than in previous decades.

oin IHS for this 1-hour webcast where experts will discuss quantifying supply chain risk with specific focus on commodity risk, country risk, and compliance risk. They will outline the importance of having supply chain intelligence to address topics including:

- Quantification of risk: understanding the interaction between concentration of production and political instability
- Comparing commodities: evaluation of different commodities to identify the relationship between inputs, high risk, and volatility of price
- Regulatory risk: current impact of conflict minerals regulations on material pricing and availability

A recording of this presentation can be viewed here: http://www.slideshare.net/ihs_supplychain/quantifying-sourcing-risk-building-commodity-risk-ratings-to-mitigate-geopolitical-uncertainty-commodity-volatility-and-conflict-minerals-risk-26064687

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Quantifying Sourcing Risk: Building Commodity Risk Ratings to Mitigate Geopolitical Uncertainty, Commodity Volatility, and Conflict Minerals Risk

  1. 1. Quantifying Sourcing Risk: Building Commodity Risk Ratings to Mitigate Geopolitical Uncertainty, Commodity Volatility, and Conflict Minerals Risk June 27, 2013 Welcome to Today’s Webcast
  2. 2. Copyright © 2013 IHS Inc. All Rights Reserved. Before We Get Started • Ask questions any time • Type questions into the “Ask a Question” area, click ‘submit’ • The slides advance automatically throughout the event • Need help? Click the Help(?) icon below
  3. 3. Copyright © 2013 IHS Inc. All Rights Reserved. Live Tweet today’s webcast: #IHSWebcast 3 Join the Conversation: Follow @IHS4SupplyChain on Twitter
  4. 4. Copyright © 2013 IHS Inc. All Rights Reserved. 4 We Want Your Feedback on Today’s Topics
  5. 5. Copyright © 2013 IHS Inc. All Rights Reserved. 5 Today’s Speakers Rory King Director, Global Product Marketing, IHS Rory King is Director, Global Product Marketing at IHS. In this role, King is responsible for go-to-market strategy and product marketing for IHS offerings that address market initiatives in Product Lifecycle and Supply Chain Management, as well as Environmental Health & Safety and Sustainability. Prior to IHS, King held positions at information management and supply chain technology providers i2 Technologies, Aspect Development, and Requisite Technology. Most recently, King’s efforts have earned more than ten individual and team-based awards in areas relating to supply chain excellence, environmental compliance and sustainability. These include receipt of company-based Excellence and Leadership Team awards, industry recognition as a Supply Chain Pro to Know, and key contributions among teams winning the Green Supply Chain Award and Supply Chain Top 100 award honors.
  6. 6. Copyright © 2013 IHS Inc. All Rights Reserved. 6 Today’s Speakers Paul Robinson Senior Economist, Pricing & Purchasing, IHS Senior Economist, Pricing and Purchasing Group, IHS Global Insight Paul Robinson is an economist in the IHS Global Insight Pricing and Purchasing group. He is a graduate of the George Washington University, where he earned a BA in economics and international affairs with a concentration in international economics. He currently works in the ferrous metals division, specializing in raw materials and assisting on the Steel Monthly, Steel Industry Review and Weekly Pricing Pulse publications. Paul has spoken about commodities at a number of conferences, including IHS conferences in Monterrey, Mexico (Commodities Outlook: Will Renewed Economic Growth Bring Higher Costs? ) and Mexico City, Mexico (Commodities Outlook: Purchasing Strategies for 2011), as well as the Association for the Advancement of Cost Engineering (AACE) conference in Anaheim, CA (Economic Risks To Consider Before Bidding Your Next Contract).
  7. 7. Conflict Minerals Regulation A Look At Geopolitical Disruption to Supply & Demand Equilibrium Rory King Director, IHS Supply Chain 27 June 2013
  8. 8. © 2013 IHS Four conflict mineral commodities are regulated • “Conflict minerals” are pervasively-used commodities • Tin • Tungsten • Tantalum • Gold • In the DRC, conflict minerals finance armed groups who control population with rape and violence • They are regulated in U.S. Dodd- Frank with SEC Final Rule • 2013 is the first reporting period with filings due May 31, 2014 8
  9. 9. © 2013 IHS Regulations are contested… will that matter? • Unrelenting social pressure • NGO and consumers • Ongoing regulatory debate • Legal challenges to SEC • Will regulation curb violence? • Activity in other jurisdictions • U.S. States • Canada • EU • Australia 9 Slavery is Not a Game: 430,558 have emailed Nintendo asking them to take credible steps to ensure slave-mined minerals are not in their gaming consoles -- and Nintendo has not responded with action. Source: Walk Free Organization, June 2013
  10. 10. © 2013 IHS Where is industry at? Roughly 25% of electronic components have conflict-free disclosures today 10 Source: IHS Electronics & Media Conflict Minerals Service, June 2013 Available Conflict-Free Disclosures/Declarations Component Manufacturers as of June 3, 2013 While a step in the right direction, progress and position statements are not disclosures.
  11. 11. © 2013 IHS You care because such regulations are disruptive to supply-demand equilibrium Innovators Early Adopters Early Majority Laggards Late Majority time (years) IHS has shown that organizations approach adoption to environmental, social, and sustainability regulations at rates consistent with innovation adoption theory. Companies tend to approach regulations in groups of similar behavior, including: innovators, early adopters, early majority, late majority, and laggards
  12. 12. © 2013 IHS This means a (long) period of instability due to bifurcation of traditional behaviors Supply Demand Product S1 D1 P1 S2 D3 P2 Innovators Early Adopters Early Majority Laggards Late Majority time (years) “compliant” supply chains “non-compliant” supply chains
  13. 13. © 2013 IHS EU RoHS illustrates how regulations disrupt component price and availability Purchase Price: Price variation factor as of May 30, 2008 Availability: Total RoHS-related EOL vs. RoHS-compliant NPI as of January 1, 2010 Source: IHS Parts Intelligence, June 2013 EU RoHS 6 in this context are lead, mercury, cadmium; hexavalent chromium, PBB and PBDE
  14. 14. © 2013 IHS You really care because price and availability impact your ability to meet KPI • Your top-five most important key performance indicators* 1. Total Cost Savings Achieved 2. Attainment of Cost Savings Target 3. Purchase Price Variance (PPV) 4. On-Time Delivery 5. Continuity of Supply • Regulations impose change to equilibrium that undermines KPI *Source: IHS Pricing & Purchasing Audience Survey, April 24, 2013 14
  15. 15. © 2013 IHS Beyond regulation, geopolitical risk at the source correlates with price volatility 15 Source: IHS Economic & Country Risk, June 2013
  16. 16. © 2013 IHS In addition to price volatility, geopolitical issues threaten to disrupt supply chains Country Risk Forecast: Mineral Producing Regions (e.g. Gold) What is the risk? Source: IHS Economic & Country Risk, June 2013
  17. 17. © 2013 IHS For instance, turmoil in Mali poses a threat to mining operations and infrastructure 17 Risk forecast Property risk Source: IHS Economic & Country Risk, June 2013 Country Risk Forecast: Mineral Producing Regions (e.g. Gold)
  18. 18. © 2013 IHS So, what about conflict minerals regulation? Here’s what our audience had to say… 18 Source: Quantifying Risk Audience Poll, June 27 2013 What’s your company’s typical adoption of environmental or social regulations?
  19. 19. © 2013 IHS Conflict minerals are great leadership opportunity for you and your organization Commodity influence… What you can do about it… Social Pressure Get engaged with industry and peers ►Get ahead of the herd on the public relations front Early adoption = competitive advantage Late adoption = market failure/restriction Regulatory Compliance Track regulations and embrace inevitability of outcomes ►Use supply chain benefits to justify early action Competitive advantage Improve supplier collaboration Gain multi-tier visibility Identify supply chain vulnerabilities Establish resiliency / risk & security monitoring Price Volatility Get religious about price monitoring and drivers of cost ►Become proficient at timing buys strategically Geopolitical Risk Correlate your key commodities with associated regions ►Institutionalize economic & country risk monitoring 19 My perspective: You cannot change nor ignore the behaviors of a globally-integrated supply chain in transformation – only monitor and manage the implications thereof
  20. 20. Quantifying Risk A Look At Commodity Risk and Country Risk Interaction Paul Robinson Senior Economist, Pricing & Purchasing, IHS 27 June 2013
  21. 21. © 2013 IHS 21 About IHS Pricing & Purchasing The IHS Pricing & Purchasing Service enables supply chain cost savings by providing timely, accurate cost and price analysis. Armed with a better understanding of suppliers' cost structures and market dynamics, organizations can effectively negotiate prices, strategically time buys, and boost the bottom line. With a database of more than 80,000 historic prices and thousands of price, wage and input cost forecasts, IHS offers more coverage than any other provider in the market. IHS has been providing forecasts of key commodity, labor, and input costs since 1970 -- helping define the purchasing advice industry. Learn more, visit ihs.com/PricingPurchasing
  22. 22. © 2013 IHS 22 Agenda • Volatility explained: What is it and why does it matter? • Where have we been: A recent history of volatility • Building commodity risk ratings: A way to quantify the interaction of country risk and commodity risk
  23. 23. © 2013 IHS 23 Agenda • Volatility explained: What is it and why does it matter? • Where have we been: A recent history of volatility • Building commodity risk ratings: A way to quantify the interaction of country risk and commodity risk
  24. 24. © 2013 IHS Volatility Explained • What is it? • Variation in price over time • How is it measured? • Standard deviation • CBOE’s VIX (equities) • Implied volatility in S&P 500 index options – risk compensation • Why does volatility matter to you? • Timing buys • Coping with changing inventory values • Makes planning more difficult 24
  25. 25. © 2013 IHS 25 Agenda • Volatility explained: What is it and why does it matter? • Where have we been: A recent history of volatility • Building commodity risk ratings: A way to quantify the interaction of country risk and commodity risk
  26. 26. © 2013 IHS Recent History of Volatility Standard Deviation of MPI (52-Week Moving Average) Chicago Board of Options Exchange VIX Index 26
  27. 27. © 2013 IHS Volatility Drivers – Micro • Just in time inventory (JIT) • Lengthening supply chains • Example: Japan earthquake • Supply boom/bust cycles • Example: Shipping Inventory/Shipments Ratio 27
  28. 28. © 2013 IHS Volatility Drivers – Macro • Monetary policy – liquidity • Exchange rates - dollarization • Exchanges (ETFs)/High frequency traders • Country risk 28
  29. 29. © 2013 IHS 29 Agenda • Volatility explained: What is it and why does it matter? • Where have we been: A recent history of volatility • Building commodity risk ratings: A way to quantify the interaction of country risk and commodity risk
  30. 30. © 2013 IHS 30 Premise • A key part of the risks associated with buying a given commodity is the risk of the country you are sourcing from • Items such as “Conflict Minerals” have gotten a lot of attention, but the truth is that the operating environment in many countries is subject to high levels of risk • We can develop a quantitative method for capturing country risk as a way of better understanding commodity price volatility
  31. 31. © 2013 IHS Selected Commodities… Energy • Oil • Coal • Natural Gas Ferrous Metals • Iron Ore Non-Ferrous Metals • Aluminum • Chromium • Copper • Lead • Manganese • Molybdenum • Nickel • Tin • Zinc 31
  32. 32. © 2013 IHS 1. Gather the (Production) Data Energy • Oil (IEA) • Coal (World Coal Association) • Natural Gas (IEA) Ferrous Metals • Iron Ore (USGS) Non-Ferrous Metals • Aluminum (WBMS) • Chromium (WBMS) • Copper (WBMS) • Lead (WBMS) • Manganese (WBMS) • Molybdenum (WBMS) • Nickel (WBMS) • Tin (WBMS) • Zinc (WBMS) 32
  33. 33. © 2013 IHS 2. Ranking the Largest Producers 33
  34. 34. © 2013 IHS 3. Calculating the Concentration Ratios • Highly concentrated production is risky in any country • Capture difficult risks like weather (Australian floods) and geography (Straits of Hormuz) • Calculate share of top 4 producers 34 Iron Ore Millions of Metric Tonnes China 1300 Australia 525 Brazil 375 India 245 Top 4 Total 2445 Global Production 3000 Top 4 Concentration Ratio 0.82
  35. 35. © 2013 IHS 4. Developing Country Risk Scores • Calculate scores for additional country specific risks • IHS Exclusive Analysis • Intra-national location specific risk • IHS Global Risk Service 35
  36. 36. © 2013 IHS 5. Weight Country Risk Ratings by Production • Simple weighted average of the individual country risk ratings to create a commodity risk rating • Multiply by the concentration ratio from step 3 to take into account additional risks 36 Commodity Top 4 Producing Countries Production IHS Country Risk Rating Top 4 Weighted Average Risk Rating Iron Ore Total 3000 China 1300 14.35 7.63 Australia 525 3.19 0.68 Brazil 375 6.68 1.02 India 245 6.77 0.68 10.02
  37. 37. © 2013 IHS 6. Gather the (Price) Data Energy • Oil (IMF) • Coal (IMF) • Natural Gas (IMF) Ferrous Metals • Iron Ore (IMF) Non-Ferrous Metals • Aluminum (LME) • Chromium (AMM) • Copper (LME) • Lead (LME) • Manganese (AMM) • Molybdenum (AMM) • Nickel (LME) • Tin (LME) • Zinc (LME) 37
  38. 38. © 2013 IHS 7. Calculate Standard Deviations 38 … ...Or just let a computer do it for you 3 Year standard deviation of the monthly percent changes of each variable
  39. 39. © 2013 IHS 8. Interpreting the Results 39
  40. 40. © 2013 IHS Assessing the Outliers – Natural Gas Why is natural gas more volatile than its scores show? •Seasonality •Difficult to store/move •Artificially low score (United States) 40
  41. 41. © 2013 IHS Assessing the Outliers – Tin Why is tin less volatile than its scores show? •Hedging (LME) •Long history operating in elevated risk countries •Mines close to ports or even offshore 41
  42. 42. © 2013 IHS SURPRISE! Oil and Copper Low Risk/Low Volatility? •Still volatile, just not as volatile as some •Growing production in United States; Growing stability in Chile 42
  43. 43. © 2013 IHS Conclusion – This is just the beginning Improvements: • Build commodity risk scores based on exports, not production • Group oil producers locked within the Straits of Hormuz with Iran’s score 43 Go build commodity risk scores!
  44. 44. Copyright © 2013 IHS Inc. All Rights Reserved. Thank you! Paul Robinson Senior Economist, Pricing & Purchasing Service paul.robinson@ihs.com
  45. 45. Copyright © 2013 IHS Inc. All Rights Reserved. 45 IHS Global Commodity Risk Scorecard *Offer limited to qualified entities until July 30th, 2013. Limited time offer to all attendees…
  46. 46. © 2012, IHS Inc. All Rights Reserved. Best Practices in Strategic Sourcing & Procurement Resilient Supply Chains: How to Dynamically Manage Risk, Opportunity, and Business Continuity July 11, 2013 | 8 AM PT /11 AM ET / 4 PM BST •Who is at risk from supply chain disruption? •What does it mean to be resilient? •Where do traditional approaches to risk fail? •Why are leaders re-tooling their super-lean supply chains? •How can your organization sense and respond to change?
  47. 47. Copyright © 2013 IHS Inc. All Rights Reserved. 47 We Want Your Feedback on Today’s Topics
  48. 48. Copyright © 2013 IHS Inc. All Rights Reserved. For More Information Send questions and requests for information to: Webcasts@ihs.com Visit IHS.com/PricingPurchasing for more information 48

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