Volatility is constant! Procurement and the tools for indexing and hedging

The study focuses on a key topic for business continuity: managing procurement-related risks, particularly those linked to currency exchange and commodities.

Before this study, it was already a well-known fact that companies use hedging tools to deal with risk. But there was no systematic overview of how Italian companies structure risk management based on the type of risk. So the researchers set out to answer the following questions:

• How is currency risk managed, and how does it differ from commodity price risk management?
• What is the level of maturity of Italian companies in each of these areas?

Fieldwork

The study was conducted through a detailed questionnaire and numerous one-on-one interviews with managers from a group of leading Italian companies.

With regard to currency risk, the results show a high degree of managerial maturity. Companies tackle this risk with a structured, integrated approach based on cross-functional processes involving both procurement and finance.

The finance function handles hedging operations, prioritizing natural hedging first, and  then derivative instruments. There is still room for improvement, especially in measuring currency exposure, but coordination between functions is already well-established.

By contrast, the approach to commodity price risk is more fragmented and often remains, at times exclusively, within the purview of the procurement function. Here, financial instruments are less common for two main reasons:

• CPOs prefer alternative tools, such as sourcing strategies (e.g. physical hedging) or contract clauses for price adjustments.
• Many commodities are not traded in liquid financial markets, making the use of derivatives difficult.

As a result, the approach is often more opportunistic than defensive, aimed at seizing market opportunities rather than shielding the company from adverse fluctuations. However, signs of progress are emerging. Specifically, contracts indexed to commodity price trends are becoming more popular. The objectives here are two: to ensure transparency in pricing with suppliers and to pave the way for financial hedging when the indices are replicable on markets.

More advanced procurement departments are already taking this path, assuming full responsibility for managing price risk, including financial strategies.

The picture that emerges suggests dual development. On the one hand, currency risk management has matured into a shared activity between procurement and finance. On the other, commodity-related risk is still evolving, but leading practices show that there’s room to develop more integrated, transparent, and effective models in this domain.

For managers, this means rethinking the skills and responsibilities of the procurement function, striving for more robust risk oversight and structured collaboration with finance. For companies, this opens the door to greater resilience through more informed and sophisticated procurement risk management.

Read another article on the Procurement Lab’s research:

Aielli, Stabilini - CBS and OBA: Two levers for steering procurement towards value creation.