Projects

The absence of a hedging policy in the purchase of raw materials

The absence of a hedging policy in the purchase of raw materials and the absence of alternatives that guarantee the best price on an ongoing basis.

About the Factory:

Company ABC is Medium wood factory in Egypt that produces furniture for export. The company uses oak as the primary raw material for its production process.

Problem Statement:

Due to the absence of a hedging policy and the lack of alternative suppliers that guarantee the best price on an ongoing basis, the company often purchases oak at market prices without any protection against price fluctuations. In the past year, the cost of oak increased by 40%, causing a significant impact on the company's operations and profitability.

Goals:

- To mitigate the impact of price fluctuations on the cost of raw materials and maintain stability in the production process. The company aims to reduce the impact of price fluctuations by 70%.

- To increase profitability by reducing the cost of raw materials. The company aims to reduce the cost of raw materials by 15%.

- To explore alternative sources of raw materials to ensure the best price on an ongoing basis. The company aims to identify at least 3 alternative suppliers of oak within 6 months.

Application:

White corp decided to direct the company to implement a hedging policy and explore alternative sources of raw materials to address the challenges caused by the absence of these practices.

1. Hedging Policy:

The company established a hedging policy to protect itself against price fluctuations in the oak market. They decided to use a futures contract to hedge against price increases. The company would purchase a futures contract to buy oak at a fixed price at a future date, reducing the impact of price fluctuations. The company decided to hedge 60% of their annual oak purchases.

2. Alternative Suppliers:

Alternative sources of raw materials were discovered to ensure the best price on an ongoing basis. They decided to import oak from other countries that offer lower prices, such as Russia and Ukraine. The company identified three alternative suppliers of oak within 4 months.