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

1. Whirlpool- IDEATE 2009 Managing Uncertainties in Procurement Costs Department of Management Studies, IIT Delhi Team Name: NinePointSomeone

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

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

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

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)

39. Our procurement cost would be supplier independent

40. AdaptabilityDuring 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