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Blunting US$20 Million Risk

The volatility of precious-metal prices threatens manufacturers' profits.

You’ll find precious metals in far more than jewelry. They’re also critical raw materials in many industrial applications—from semiconductors and sensors to new technologies, such as fuel cells.

Growing demand, scarce supplies, and frequent supply shocks—ignited by a mining strike or geopolitical event, for example—can cause precious-metal prices to swing wildly, threatening the profits of companies that buy them.

Facing this challenge, an industrial-goods manufacturer asked us this double-edged question: How might the company maintain or improve its profitability while protecting itself from the volatility of raw-material prices?

Reducing Earnings at Risk Without Increasing Costs

The risk was even bigger than our client realized. Through a historical analysis of the company’s contracts, customer purchases compared with forecasts, and precious-metal prices, a BCG team revealed that the manufacturer could lose as much as US$20 million a year if it were to maintain its current practices.

To solve the problem, we developed a novel pricing strategy that takes into account each individual customer’s buying history, forecast accuracy, and desired duration of firm fixed pricing. The new strategy, which incorporates a combination of financial instruments, effectively eliminates our client’s earnings risk without additional cost. The client’s customers, in turn, gain more pricing options and greater pricing transparency.

To help our client implement this change, we also developed a detailed playbook of the actions the company should take to roll out the new strategy, both internally and with customers.

Q&A with the Financial Strategist

Drew works in our Chicago office. He joined BCG as an intern in 2010, became a consultant in 2011, and is now a project leader. Drew has an MBA from the Kellogg School of Management and a BA in political science and international studies from Northwestern University.

Q: What was your role on this project?

A: I built the financial model that estimated our client’s total earnings at risk, and I uncovered insights into the actual buying patterns of the client’s customers compared with what they had forecast. In many cases, our client was actually providing “free insurance” to its customers without fully recognizing the potential cost of that risk. I also worked on the derivatives strategy we created.

Q: Sounds like a lot of responsibility. Did you have help?

A: We do take on a lot of responsibility, but it’s not without an equal amount of support. On this project, I worked closely with Artem, another BCG project leader, and we continually pushed each other—in the best sense. We reached out to other BCG experts—in statistics, for example—when we needed help, continually pressure-testing each other’s work.

Q: Would you describe a valuable takeaway you learned from this project?

A: So many things—for example, the value of bouncing ideas off of others, learning from different perspectives, and constantly looking for a better way, which we’re really good at. I also learned the importance of involving clients at every decision-making step, so they really “get” what we’re doing and are excited by its potential. In the end, what good is a great idea if the client isn’t going to adopt it?

Q&A with the Playbook Writer

Burt worked at BCG as an intern in 2012 and joined our Chicago office as an associate in 2013. He has an AB in chemistry and physics, with a secondary concentration in neurobiology, from Harvard College at Harvard University.

Q: What was your role on this project?

A: I translated our team’s strategy into a playbook—a step-by-step guide to everything our client needed to do to transform a great idea on paper into actual work processes. And we did that for every group the new strategy touched—from treasury to procurement to sales. We made the plan as easy as possible to implement, so our client would be able to stay focused on its business and customers, not precious-metal prices.

Q: How does that relate to your science background?

A: I was, and still am, fascinated by the sciences, breaking down problems into their parts, creating and testing hypotheses, and working collaboratively in small teams. That very outcome-oriented approach is exactly the process I used to create the playbook, and it’s why I was attracted to join BCG right out of school. In many ways, consulting mirrors what I did in the lab—with much faster results.

Q: There’s still a big difference between chemistry and consulting. How do you bridge that gap?

A: My experiences at BCG, together with the company’s extensive training resources, have enabled me to develop new skills faster than I had ever imagined possible. I think that BCG looks for people like me who love problem solving and then surrounds us with the support we need to grow. It still feels as if I’m sprinting uphill some days, but it never feels like I’m running alone.

Q&A with the Partner

Petros joined BCG in 1997. He is a partner and managing director in our Chicago office, and he also heads procurement in North America. He holds a BS in law from the Demokritos University of Thrace, LLM degrees from the London School of Economics and Harvard Law School, and an MBA from INSEAD.

Q: How did you pick the team for this project?

A: Bob, the senior partner on our team, and I always try to assemble teams of people who complement each other with the right problem-solving skills, rather than picking people just because they have worked on similar projects before. “Same thinking” creates “same answers” and our goal is to deliver breakthroughs.

Q: One of your team members called you a “ruthless prioritizer.” What do you think that means?

A: [Laughing] I think that’s right. We had a very ambitious scope, an overwhelming amount of data, and seven weeks to develop and implement our strategy. Clearly defining what we would be focusing on with each team member and our client was critical. My job is to keep us focused on doing outstanding work on the few things that really matter.

Q: How did you win buy-in for such a big change?

A: We involved our client in every step of the process, explaining what we were doing and why, and sharing our findings: everything was out in the open. We held a lot of one-on-one meetings, so people could understand the risks we uncovered and the reasons for our strategy. We worked to help our client make a more informed decision, not to sell a solution.

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