Planning for the worst
Staff -- Purchasing, 4/4/2002 2:00:00 AM
The last five years have seen a rise in the number of opportunities that CPI buyers have for managing price and supply risks in their contracts with suppliers. For example, third-party market makers have been 
offering financial tools for hedging price volatility in such chemical products as plastic resins and petroleum derivatives. With that trend in mind, PURCHASING included in its study a benchmark question aimed at gauging the extent to which buyers of chemicals and chemical raw materials take advantage of risk management opportunities in contracts with suppliers. The result: A surprisingly high 35% of CPI buyers surveyed say they build some form of risk management into their contracts with suppliers. Among larger firms, the figure soars to 47%. Among smaller firms, it drops down a bit to 32%. Twenty-three percent of CPI buyers say they use futures contracts or other financial instruments to hedge price and/or supply risks for chemicals or chemical raw materials buys. Twenty-seven percent use futures contracts to hedge their energy buys. Other popular forms of risk management in chemical contracts involve liability shifting where product quality is concerned and rights to cancel orders in situations where demand is likely to waver substantially.
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