Risk management in international supply chains: the case of natural hedging

The management of global supply chains is a source of competitive advantage. The related benefits are, however, tightly coupled with rising uncertainty and risks such as the volatility of foreign exchange and commodity markets. These supply chain risks significantly endanger small and medium-sized (SME) suppliers that operate in different currency areas in purchasing and sales. Although significant advancements in the area of supply chain risk management have been achieved in the past, a brief look at the current literature shows that contributions often remain at a general and theoretical level. The present paper contributes a specific risk management approach for international supply chains, namely natural hedging. Within that interdisciplinary concept, a globally active focal firm - an original equipment manufacturer, for instance - hedges currency and commodity price risks (financial options) as well as operational supply risks (physical options) by centralizing commodity supply with its SME suppliers. Natural hedging can contribute to the reduction of SME suppliers' supply chain vulnerability in the interests of the entire supply chain. The findings are explained within a formal analytical model and a scenario analysis.