The first article of a 5-part series on How to Embed Forecasting Capability into Aluminum Sourcing Practices.
This initial step requires the aluminum buyer to fairly and accurately assess the company’s degree of exposure to aluminum price risk as well as determine the risk tolerance of the organization before implementing any forecasting capability.
Estimating the Degree of Aluminum Risk Exposure
A company has several checklist items to examine to ascertain price risk:
- How many dollars does the company spend on both aluminum semi-finished materials and/or parts that contain aluminum?
- How does the end-to-end price equation work with key customers? For example, pass-through pricing reduces risk, but fixed pricing with customers does not. How readily can the company pass through price increases?
- What is the company’s policy regarding hedging? Is the company obligated to hedge under any circumstances?
- How does the company manage its purchase contracts? For example, does it buy on long-term contracts only? Does it buy on the spot market only?
The next important question to ask involves the company’s sensitivity to aluminum price volatility.