Commodity Strategies

[Commodity strategy] ... should be proportionate to the value, complexity and strategic importance of the commodity (The Scottish Government).

Information about Commodity Strategies

A commodity sourcing strategy is a specific sourcing strategy for a category or group of supplies or services (Rendon, 2005). There are two categories of commodity strategies. The first refers to spot-market transactions, or cash transactions. Spot market is the traditional commodity instrument where buyers purchase the commodity in a predefined quality category on the cash market, acquire possession and have no direct contact with the supplier (Ferris, 1997). Spot market offers flexibility but is characterised by higher commodity prices and greater price uncertainty (Seifert et al., 2004). The second category includes forward purchasing mechanisms. This commodity instrument is usually used by firms to secure the commodities needed for future production. Forward purchasing includes two mechanisms: forward buys and forward contracting. In a forward buy, manufacturers purchase and take possession of a commodity in advance of manufacturing needs at times when spot-market prices are favourable. In a forward contract, the supplier specifies delivery of a commodity at a certain future date. Such contracts usually include all of the transaction’s details, such as quantity to be traded, quality of the commodity, delivery time and place, and price determination (Ferris, 1997).

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