and pricing for the upcoming
manufacturer implementing selling
price adjustment formulas based on
the public commodity index for resin.
agreement with its largest
customer. The tolling model is
based on a direct pass-through of
the commodity raw material cost
in accordance with a specified
formula. This business arrangement
often requires strong customer
relationships and transparency of
conversion costs and gross margin.
Eric Barbieri, CTP, is a partner of Richter Consulting,
a specialty restructuring and financial advisory firm.
He has been advising lenders, companies, and private-equity firms for more than 15 years in a wide spectrum
of industries, including manufacturing, distribution,
retail, equipment rentals, services, and construction.
He can be reached at firstname.lastname@example.org.
c Risk transfer to an outside party. Aligning purchasing and sales
terms can be challenging when dealing
with multiple vendors and customers.
Although companies should not rely on
them exclusively, traditional third-party
hedging strategies can be an important
tool in cases when transferring
commodity risk to direct business
partners is not feasible. It is important to
note that there are no (or limited) open
hedging markets for many raw material
inputs and that a company’s financial
situation or debt structure may preclude
the use of financial derivatives.
d Internal risk mitigation, which requires that a company look
internally for strategies to mitigate
commodity price risk. Options include:
development and manufacturing
processes. This may enable the
use of lower-cost substitute
materials or shifting to foreign
sourcing from areas benefiting
from cost advantages.
While maintaining high inventory
levels, substituting raw materials, or
moving to foreign supply sources
represent significant operational risk
and incremental costs, these approaches
may become justified if price volatility
and overall cost of critical raw materials
increases dramatically or certainty of
supply from current sources is in doubt.
Analysts and experts have widely debated
the causes of global commodity volatility,
but they seem to agree that unstable
market conditions are here to stay.
While most domestic manufacturers
may be pining for the good old days,
only those that adapt will survive. J
Commercial Real Estate
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