Integrate the supply chain to mitigate risk

10 July 2013

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11 July 2013 | Paul Snell

Supply chain integration is a more effective way to manage risk than to hedge against it.

This was the view of a majority of senior buyers attending a breakfast debate this morning in London.

While there was broad agreement that hedging strategies could be an effective method of managing rising commodity costs, the overriding opinion was this could only deal with one aspect of the threats to organisations facing CPOs and CFOs.

Although hedging can tackle financial risk, it is only through greater supply chain integration, with deeper relationships and collaboration, that potential threats to a company such as physical (like natural disasters), quality and reputational hazards could be mitigated.

“To develop and manage your supply chain holistically, you need significant integration with both your customers and your suppliers to have better input in developing your risk strategy,” said Phil Joss, director at 4C Associates, who hosted the debate.

A view was put forward that investors in businesses with direct exposure to commodity markets, such as smelting, are more likely to treat commodity price risk as something as unavoidable. However, investors in businesses such as consumer goods manufacturers would be less accepting and expect companies to mitigate.

A question was raised as to whether companies should pass risk down the supply chain, through contracts. Joss said organisations were looking more closely at how second-tier vendors manage risk, but not necessarily passing on responsibility for it. Other participants in the debate were more strident, arguing risk should not be outsourced.

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