BUSSCM 700 Supply Chain Management: Hedging Strategies

Introduction

Hedging strategies are the options which are exercised in relation to the price, demand and exchange rate contingencies that are faced by the firm in the supply chain context. These are regarded as the supply chain networks which are derived through global co-ordination of the production and sourcing decisions. This paper will explain hedging in relationship to strategic purchasing policies in a manufacturing context. In a supply chain environment, the firms will find themselves exposed to the price risks and the supply chain which is related to the price risk of the partner. Moreover, the supply chain firms cannot control the price risk through the process of hedging alone (Inderfurth, Kelle & Kleber,2013).

Discussion

In a supply chain, increase in price can result in the financial loss of the suppliers. The situation will become worsen to such a point in the supply disruption that the suppliers cannot make the products profitably.  For example, in 2011, steelmakers have tried to increase the price by six times and this led to a total increase in the revenue by 30%. On the other hand, according to the extant theory there are many car and appliance manufacturers who did not pay much attention to the increase in the steel price. This is because they do not purchase the steel from the steelmakers directly. However, this has become a massive problem for the financial weaker suppliers for whom the cost of the steel was a greater concern. This situation will become worsen to the point of supply disruption because the suppliers cannot profitably manufacture products for their buyers (Chaudhry et al., 2014).

The purchasing options provides a margin free way and it helps in the determination of price of a particular commodity. There are many options which are available when purchasing a product for hedging. For example, when applying for an insurance coverage on a new vehicle, it is necessary to pay the premium amount for a period of time. This is applicable when purchasing any other commodity. The month of delivery and the purchase options can be selected by paying a certain amount of the premium according to the convenience of the client. The money which is at the risk is the sum  paid for the option. When the market benefits the cash position, the option will become worthless and the individual will be out of the premium paid. The same is applicable for the insurance on the vehicle. The individual will not be included in the premium coverage if he/she does not use the insurance before the expiry

The firms also need to take care how their supply chain partners will hedge or use any hedging activity which will be impounded in the transfer price of the product. It can also be said that the hedging behavior of the partners will affect the hedging behavior of the individual suppliers. The suppliers by agreeing to sell their outputs at a predetermined price and keeping a track of all the factors that will affect the productivity (Song, Lee & Makhija, 2015). Both the upstream and the downstream suppliers are subjected to various kinds of default risk. The firm will guarantee supply contract performance when the expected profit which is associated with guarantee is much greater than the expected profit which is associated with default in certain states. The firms can also commit to the guaranteed price by purchasing future contracts on various kinds of underlying input commodity (Cavusgil, Knight & Riesenberger, 2013).

Conclusion

Thus, it can be said that to sustain hedging in the equilibrium position, it is important for both the firms to hedge and maintain the supply chain breakdown. This equilibrium hedging policy is considered as partial hedging policy. In certain situations, it is seen that the firms hedge in equilibrium although it reduces the expected payoff. The financial hedging of stochastic demand will also help in increasing the supply chain. Thus, it can be said that hedging policies tries to eliminate the price risk which is associated with it. The firm will try not to get engaged in hedging when they glitches in supply because such activities expose the firms to financial losses.

References

Cavusgil, S. T., Knight, G. A., & Riesenberger, J. R. (2013). A framework for international business. Pearson.

Chaudhry, D., Iqbal, N., Mehmood, M. S., & Mehmood, A. (2014). Determinants of corporate hedging policies and derivatives usage in risk management practices of non-financial firms.

Inderfurth, K., Kelle, P., & Kleber, R. (2013). Dual sourcing using capacity reservation and spot market: Optimal procurement policy and heuristic parameter determination. European Journal of Operational Research, 225(2), 298-309.

Song, S., Lee, S. H., & Makhija, M. (2015). Operational hedging in foreign direct investments under volatile and divergent exchange rates across countries. Journal of World Business, 50(3), 548-557.