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Treasury and Procurement: Allies in the War on Risk

Why companies need to manage commodity risks in the same way they manage currency and interest rate exposures.

By Julian Eyre | Updated on July 22, 2015
Treasury procurement cooperation combine risk managementWar makes for strange bedfellows. Case in point: In the corporate battle against currency and commodity risks, companies are increasing collaboration between, and even merging, the treasury and procurement functions.

It’s a practice that is sensible and is here to stay. That’s partly because businesses in many diverse industries face considerable exposure to commodity risks through their supply chain. An automaker may take a hit to earnings thanks to an unexpected spike in metals prices. A major manufacturer of cleaning products may find its slim margins wiped out due to an uptick in chemical prices. A coffee house chain might fall short of consensus earnings estimates because of higher dairy costs, and so on. In industries where pass-through of raw materials prices is difficult, commodity price volatility can have a profound effect on the bottom line. The manufacturing, retail, and food and beverage sectors are particularly sensitive to commodity price swings.

The other key driver of increased alignment between treasury and procurement is foreign exchange (FX) risk. Large multinationals tend to be hit particularly hard, but FX exposures can damage the financial statements of any company with a supply chain and/or distribution channels spread across multiple currency zones.

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