Measuring the financial effects of mitigating commodity price volatility in supply chains

Firms can choose from an array of approaches for reducing the detrimental financial effects caused by unfavorable fluctuations in commodity prices. The purpose of this paper is to provide guidance for effectively estimating the financial effects of mitigating commodity price risk volatility (CPV) in supply chain management decisions. This paper adopts two prominent and complementary methodologies, namely, total cost of ownership (TCO and real options valuation (ROV), to illustrate how commodity price risk mitigation strategies can be analyzed with respect to their effect on costs and performance. The paper provides insights through a case study to demonstrate the application of these methods together and establish the benefits and challenges associated with their implementation.