Situation

Improve management of inherent commodity risks

EnergyCo was in the business of manufacturing and delivering a commodity product.  Its business model also included leveraging its marketing and logistic capabilities by reselling the commodity for smaller producers.  Recently, commodity prices had become extremely volatile which made it more important for EnergyCo to better understand and manage the risks inherent in its business model.  Inventory was an area particularly sensitive to changes in commodity prices, and this was of concern to EnergyCo.

Synaptic Decisions was asked to assess the risks embedded in the supply chain, identify opportunities, and develop strategies to improve inventory practices.

Approach

Understand commodity risk throughout the supply chain

Our approach was to:

• Review EnergyCo’s portfolio of contracts to understand and characterize price / volume exposure on inventory throughout supply chain
• Analyze & model supply chain flows, flexibilities and uncertainties
• Develop new inventory policies and trading strategies to optimize return on inventory

Insights & Recommendations

Trading versus operating inventory

We found that under the current inventory policy, EnergyCo’s return on inventory was greatly affected by commodity price and demand forecasts. Our recommendation was to implement a hybrid trading and operating inventory approach that reduced operating inventory levels, utilized an arbitrage inventory trading strategy, and aligned contract pricing with smaller producers to market.

Results

Dramatically increased risk adjusted return on inventory

• Increased internal rate of return (IRR) on all inventory assets by 33%
• Reduced risks