|Knowledge Worker Performance - Peter Drucker|
With this in mind, let's start by considering a topic of great importance for manufacturers: the cost of raw materials. The seemingly uncontrolled volatility of important materials like copper or oil turn business planning into a little more than a wild guess. Thankfully, there are ways to solve this problem. There are well established, liquid and transparent derivatives markets that can help a business hedge against raw material volatility. I am talking about Futures and Options markets. Both offer alternatives that can help insure against the kind of market gyrations that could put a company out of business. From these, the Futures market is the simplest to understand. Options are much more flexible. Unfortunately, such flexibility comes with a high price in complexity.
Like with other insurance policies, a business manager must understand that there is a cost associated with an insurance policy that protects profitability against large swings in cost of goods. The cost of such insurance is the limited downside. The fact that a business will not have to suffer the same fate as all other businesses in the same industry when raw materials go up is the great upside.
But chances are that the manager or owner has no idea on how to even start hedging through Futures contracts. It is therefore essential to employ a qualified knowledge worker who could help set up a basic insurance program for the company. As I mentioned above, there are many areas where specialists bring value to a company way beyond the leader's capability.
To help a manager get a beginning understanding of what Futures are, I found this great video from the UK's Money Week magazine.