Managing commodity price volatility and risk

During the past decade, commodity price volatility has become a significant challenge for many firms. Variation up or down in the price of a commodity like oil, corn or steel is its price volatility. All organizations are exposed to risk from commodity price volatility, be it from direct raw material and energy purchases or from commodities purchased by their suppliers — or both. Profitability, performance relative to budget, the ability to meet customer requirements, and the effectiveness of product-pricing decisions are all affected by commodity price volatility. The goal of this research is to investigate how firms identify, assess and manage commodity price volatility. We studied 12 firms: five from the U.S., four in Germany, and three in Italy. These companies represent industries such as automotive/transportation, electronics, aerospace, chemicals, food processing, furniture, packaging and equipment manufacturing. For each firm, a large percent of its overall purchases consists of price volatile commodities either in direct purchases or from its suppliers’ purchases.