The value of a first-class risk management program is more than simply getting positioned correctly in the market. A clear framework for decision-making and reporting must be in place to allow the efforts of the sourcing team to be communicated in a way that aligns the entire organization. We are strong believers in the “no surprises” approach to managing risk—and that’s what we offer our clients.
$3 Billion Firm with Businesses across a Broad Range of Products
This conglomerate of businesses had very large exposures to the grain, oilseed, dairy, and energy markets.Businesses ranged from producers whose prices charged changed daily with the market, to school lunch programs with fixed price products as much as (not AT, which is what is currently there) 18 months forward, to feed suppliers.
Although the client had a good handle on purchases and coverage, it did not have any transparency to the risk associated with forward/fixed sales of finished goods. Through a process of risk quantification with each of the 27 business units within the organization, Beeson & Associates, Inc. established a standardization of the risk by business.
Clear position limits were set by business, along with a reporting structure that allows senior management to full understand expected prices and associated risks. The entire process was captured in an extensive policy document that serves as the roadmap for the corporate risk officer who was the key contact for the project.
$500 Million Baking Company
The sourcing team was totally isolated from the finance personnel. Forecasts were given via email and finance developed forecasts not knowing if the forecasts were certain (coverage in place) or could change with the market. The buyers did not have clarity of the business’s unique needs based on margin pressures or new contracts that were impacting the business. Beeson & Associates, Inc. instilled communication processes that brought together the business team and instilled a broader understanding of the decision process. Additionally, reporting frameworks provided a range of expectations in addition to spot forecasts so financial plans could be developed knowing the risks due to open positions.
The client has negotiated the volatile commodity markets of the past five years without a major miss in its profit projects due to commodity cost pressures.
How the Process Works
- We develop a full list of commodities and their volumes per period.
- We review the commodity policy. However, in most cases it does not exist or is not being utilized.
- Interviews with a broad range of stakeholders are held. This includes purchasing, finance, marketing, sales, as well as senior management to calibrate expectations and goals of the risk management process.
- We meet with the client’s decision-making team to review market fundamentals and recommendations. Once an agreed strategy is put in place considering all available market tools, we continue to meet monthly to follow up and review the strategy. The decision-making team is usually led by purchasing with participation by key finance and marketing personnel.
- We integrate a reporting process that measures the metrics identified as key to business success.
- We update or create a formal policy document.
- A clear expectation of purchasing and the risk management process that provides the basis for positions and market activity.
- Communication across the organization that is useful for all functions to coordinate activity to manage risk.
- A policy document that provides an operating roadmap for action.
- For many firms, it’s the first time the purchasing function is fully aligned and understood by the business.