Management of commodity volatility | Manufacturing industry technology


We are now faced with a timeless problem that comes with economic growth and suddenly rising demand: rising costs and the limited availability of raw materials.

Coupled with issues like soaring raw material prices, widespread component shortages, and supply chain disruptions, almost every industry is affected in some way. For many companies, the solution to these problems is just a “money fixation”, while others struggle with a shortage of money.

Executives must determine the best course of action to offset short-term price increases, protect margins, deliver products for their customers, and position their business for long-term success. Specifically, we see many production and industrial companies examining options such as temporary plant closings or passing the costs on to customers – neither of which is a good sign of their competitive position or employee loyalty.

There are many ways to weather this storm. In the following, we examine the current state of raw materials, what risks price volatility poses for a company and some best practices to mitigate them.

The current state of the raw materials

The economy opened much faster than many expected. This accelerated schedule, a spate of supply chain disruptions and ongoing labor shortages hit manufacturing especially hard. From steel and copper to plastics and lumber, purchase prices are rising as the US economy reboots.

It remains to be seen how long inflation will remain an issue and a topic of discussion in all boardrooms. There is some optimism as supply chain leaders work to address the recent bottlenecks and side effects of weather-related anomalies.

Many companies face a shortage of money. Soon we are likely to see a lower earnings trend in the industry as executives take steps to stabilize operations while offsetting increased competition for labor. Although many companies regularly consider cost-cutting programs, inflation and external disruptions are now one step ahead of profits.

For this reason, liquidity management – cash on hand and availability of credit lines – is of the utmost importance in today’s environment. Even a company with a high cash flow has to protect itself from a purely efficiency point of view. There will be opportunities to grow the business by taking advantage of an increase or long-term shift in demand for the end product. You need to be able to gradually invest in capital goods to meet this demand.

As you prepare for the next anomalous event and mitigate the risks of the current climate, there are a few important things to consider in view of the many benefits of diversification efforts. The focus on diversifying the supply chain, the location of the facilities and the distribution channels protect existing operations and provide the capacity to meet the increased demand for products.

Liquidity management and ensuring that your company has adequate capital resources are crucial in order to survive disruptions. A basic approach would be to balance sources of capital with capital needs. Short-term working capital needs, while somewhat obvious, should be financed with short-term debt such as a revolving line of credit. Likewise, long-term assets should be financed with long-term debt. Companies that do not tailor the duration of their funding sources to their needs often find themselves in a “cash squeeze” because they do not have sufficient liquidity to meet unexpected short-term needs.

When looking for a lender, you may find the landscape more complicated than expected. Traditional sources of capital, including regulated commercial banks, are not always a reliable source of funding. This applies in particular to manufacturers and industrial companies whose performance was negatively affected by the pandemic or other current events. These companies need to be creative and strategic in identifying faster and more flexible sources of funding. Non-bank lenders such as private credit funds are becoming attractive credit alternatives as many banks are pulling out in the current economic environment.

With economic uncertainty, there are also greater opportunities; In the event of future disruptions, however, risks must be reduced or hedged. Companies that are able to consider investing in facility expansion or upgrading and / or M&A activities should do so. These investments require capital and bespoke solutions from creative lenders to provide a flexible capital structure that enables companies to better handle the unexpected.

Benefits of Alternative Lending

The optional facility can enable you to ensure the availability of alternatives to meet a capital requirement, either with cash or the availability of credit. This is a concept that applies to multiple operational viewpoints, including the supply chain, sales channels, site locations, and more.

Unfortunately, capital projects are often reviewed by potential lenders in the light of a company’s past performance. As a result, many companies are being penalized for inadequate performance during the pandemic and in response to a one-off event that does not and should not define their performance. In light of regulatory oversight, we see that bank lenders often generate “lower average” income in their lending decisions, resulting in lower loan amounts.

When production resumed, work continued, but on delayed schedules. Alternative lenders have the option to reconstruct financial performance according to the originally expected schedule, not the delayed one. Regulated commercial banks are often not permitted or inclined to make such adjustments, which can result in less borrowing by the company.

Alternate lenders can be aggressive on accounts receivable, inventory, and equipment, and search and normalize performance anomalies, whether from an ice storm, malware attack, or even labor strikes.

While commodity prices fluctuate, it is important to establish and create a system that allows flexibility. Smart use of capital can result in better cash flow and a better position for the next disruption or resource relocation. There are many opportunities to invest and build a foundation for success when leaders take the time to review their medium to long-term strategies as they address short-term needs.

John Felix is ​​the managing director of White Oak global advisor.


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