Procurement, treasury or finance? Where should responsibility for commodity price risk management reside?
- When a business is exploring commodity price risk, one of the first questions to come up is: where should responsibility for managing risk sit – procurement, finance or treasury?
- In some companies, commodity price risk is managed by the sourcing/ procurement department. However, procurement’s over riding objective in most businesses is to minimise costs, which is very different to the task to managing risk – and risk (as a result of volatile markets) is what CPRM is all about.
- Given the high volatility of commodity prices and the scale of their potential effect on earnings and cash-flows, there are solid arguments for CPRM to sit within the treasury or finance functions. In our view, ideally treasury. These exposures can then be managed following similar governance processes as other exposures, such as FX risk.
- Effective CPRM means creating the controlled framework that ensures the interplays between treasury and procurement are harmonious.
- Day-to-day, procurement would still be active in making buying decisions on the basis of their view of the market. However, it’s critical that a) procurement operates within a controlled risk framework, and b) they should not be marking their own homework – all of which would be undertaken by treasury.