The last several months have been challenging for the oil industry, however this pain has turned out to be a gain for consumers, and companies whose good and services depend on crude oil.
It is the opportune time to dust-off those supplier long term agreements (LTA) on products influenced by oil prices, and renegotiate for cost savings. However, not every company will be in a position take advantage of the current low oil prices within their supply chains.
For example if a company has an LTA in effect with an oil supplier with fixed hedging strategy effective until a future date, such a company may not be able to touch cost savings benefits from low oil prices. The Fixed hedging clause in the LTA only benefits this company when the commodity prices increases, however when it decreases, it results in loss of tangible costs savings. This was the case for a major trucking company which locked the price for 25% of its fuel for two years, as a result of its fixed hedging strategy the company incurred losses of $4.5 million from its fuel hedging transactions in the fourth quarter of 2015.
Companies can mitigate hedging risks from commodity price rise and drop; it requires provisions for flexibility in hedging clause of the supplier LTA impacted by commodity prices. Without a flexible hedging strategy, companies stand to lose out on valuable savings opportunities when commodity prices drop significantly, and suppliers stand to loses out on pricing adjustment when commodity prices rise significantly. Flexible hedging is that is a win-win for companies and their supply chain partners.
It is a tool that shields companies from commodities market risk and provides a windfall of unexpected savings when commodity prices drop drastically.
To protect against LTA hedging risks, supply chain managers must be creative, allow for flexibility, so that they can benefit from commodity market without negatively impacting the total cost of acquisition of goods and services.
Benefits a flexible Hedging strategy
- Allows companies to harness savings from significant commodity price drop.
- Allows companies to adapt swiftly to correct hedging strategy based on market.
- Allow companies to amend hedging clauses prior expiry date of the LTA.
While hedging can protect supply chains against commodity and foreign exchange fluctuations, it can only do so efficiently if it is flexible. This flexibility ensures that regardless of the market, a company's supply chain costs are actively protected against the unpredictability of the commodity markets.