Fast-Moving Goods, Risk Analysis, and Spend Control

It seems reasonable that in a recession, cost containment would become hot topic, and in the world of supply chain management, it’s known as "spend control."

I was interested in a recent blog describing spend control in the "fast-moving goods" (what used to be called consumer packaged goods) industry, where taming volatility in cash flow is a huge challenge.  In it, the chief procurement officer at DelMonte pointed out that forward contracting for commodities is a standard practice that involves a great deal of decision making under uncertainty–and is therefore wide open to improvement through risk analysis.  Apparently this was news to many in Dave McLain’s audience.   
The key to profitable forward contracting, McLain observed, is to structure contracts so that your suppliers don’t push their risk to your company. Not always possible, he acknowledges, but his company uses a variety of operational risk software to identify and anticipate the biggest drivers of operations risk in the commodity markets where they are active.  This is a complex set of analyses, and among other techniques, he recommends using Monte Carlo software to go beyond the usual option valuation and look at production forecasting and statistical analysis of historical data on cost and price volatility–from the supplier’s standpoint.  The risk assessment models will churn out a range of what potential commodity costs could be, so the procurement folks can build caps and locks into their contracts.

All of this requires some analytical knowhow, and the Spendmatters blog promises a primer on the DelMonte approach.  It’s worth following because it ain’t easy, it ain’t simple, but it’s how you get to spend control.

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