Commodities, Volatility and the Corporate Procurement Officer

Feb. 17, 2016
Why do supply chains have so much trouble with the term “commodity”?

For firms across a multitude of businesses—agriculture, beverages, transportation and others—the management of commodity purchases is frequently the focus of the chief procurement officer (CPO). But there are different definitions of what constitutes a “commodity”: supply chain advisors tend to use the word to mean any supply that has a common specification or characteristic. Therefore, in this broad definition, commodity category management can include items as disparate as vehicle tires, electric power and concrete blocks.

On the other hand, many risk professionals use the term commodity to describe a supply that has a fungible contract—one that can be transferred from one party to another easily—as well as an external market with frequently observable prices. A futures market is the simplest example. Therefore, what a risk professional and a supply chain professional call a “commodity” can be quite different.

When thinking about commodities, it’s useful to think of them in two buckets: “procurement commodities” for those that meet the standard supply chain definition and “tradable commodities” for those that meet the risk professional definition. In some firms, these different classes are handled by separate groups. In others, they are handled by the CPO organization. In still others, the physical purchases and logistics are handled by the CPO and the financial transactions that can be undertaken in a transparent market (such as futures) are managed by treasury. All of these models have different benefits and weaknesses.

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