Some great ideas from Yossi Sheffi at MIT. I’ve been teaching about these since the 1990s, inspired by the classic book below, which has a wonderful chapter and case on the subject.
Global Operations and Logistics by Dornier, Ernst, Fender, and Kouvelis. Amazon Link
The concepts are similar to what Yossi is saying. You can hedge various ways:
- financially with options, futures, and contracts— (derivatives; we are always quoting the Southwest Airlines jet fuel example of a few years ago, but this kind of hedging needs to be part of every company’s portfolio of skills);
- operationally, by locating production in several areas and being able to scale it up or down according to where you have the best total return after expenses, including currency conversions for procurement and sales (drug companies are expert at this);
- sustainably, by shifting away from or replacing inputs that are scarce or penalized by currency or political issues (eg. ‘conflict minerals’).
What would you do in the case of the Greek crisis of today, the crisis that isn’t a disaster yet?
Recently the airlines have not been so successful hedging fuel prices with derivative contracts. It’s gambling pure and simple, and markets for commodities are remarkably likely to shift without telling us. So operational and sustainable hedges are more likely to yield guaranteed results. But they are costly, involving product or process re-engineering, or multiple facilities operating at less than full capacity in different enough locations to produce anti-correlation with other markets.