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Commodity risk management
- 1. Whirlpool- IDEATE 2009 Managing Uncertainties in Procurement Costs Department of Management Studies, IIT Delhi Team Name: NinePointSomeone
- 3. Our approach
- 6. Model used
- 7. Simulation results for each commodity
- 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
- 23. Aluminum - Seasonal Demand
- 25. Advantages of the Model
- 28. Cost Savings for Copper due to the Model
- 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
- 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