Lean Strategies International
Menu

Glossary

Would you like to add a term to the community? Click Here!

Hedge Inventory

2/15/2022

0 Comments

 
Click Here to Subscribe to Our YouTube Channel.
Hedge inventory finds its roots in the term ‘hedging’.  Hedging which means reducing or controlling risk is a common practice in many industries and a not so common one in others.  Hedge inventory is actually very similar to anticipation inventory, except there is more risk and quite a bit less certainty in increased demand and decreased supply.
Hedge Inventory
Click on the Photo to Subscribe to Our YouTube Channel.
​Hedge inventory is the excess inventory that is purchased in advance or held in stock as a protection against price increases.  The main objective of hedging is reducing or limiting any risk associated with future price fluctuations.  A secondary objective of hedging is to take advantage of future price fluctuations.
Examples of Price Fluctuations:
  • If industry prices are rising, you would want to hedge when the supply cost is low.  This helps protect your net profit.  There are many reasons that price fluctuations could occur.  It may be the simple result of seasonal variations or even sudden market disruptions. 
  • Changes in exchange rates.
  • Political situations.
  • Economic promotions.
  • Clearance sales.
  • Employee strikes.
  • New government policies.
  • Vendor shutdowns.
Hedge inventory can also be inventory that is built up for an event that has a very rare chance of happening.  Of course one should weigh the risk closely as this approach is avoided by most businesses since there is no guarantee on return.  
Example of Hedging:
  • Let’s assume that our example involves a company that depends on a certain commodity.  Suppose that K&K’s oil is worried about the volatility in the price per barrel of oil. The company would be in deep trouble if the price of oil were to skyrocket because this would severely impact profits.  To protect against this, K&K can enter into a futures contract.  This contract hedging tool allows K&K to buy the oil at a specific price at a set future date and time.  Now, K&K can budget without worrying about the fluctuating price of oil.  Another way that K&K can hedge is by strategically buying up all the barrels of oil and holding the hedge inventory.  This now guarantees that if prices fluctuate, K&K’s cost will always remain constant and allow them to control their profit margins.
Two Types of Hedging:
  1. Hedging inventory for a sale - Hedging inventory for a sale is when an organization hedges inventory so that they can avoid fluctuations in future sales.
  2. Hedging inventory for a purchase - Hedging inventory for purchase is when a company hedges inventory to avoid future fluctuations in supply or purchases.
Summary:
  • Hedge inventory is a method of building up inventory to protect against future events.  This requires a great deal of forecasting and speculation and should be done with caution.  Remember, inventory whether hedged or part of a regular cycle ties up assets.  And that’s it, Hedge inventory.
Challenge:
  • What examples of Hedge Inventory can you think of?  Share your thoughts in the comments section below and receive a coupon to one of Lean Strategies International LLC's courses.
0 Comments

Your comment will be posted after it is approved.


Leave a Reply.


    Glossary


    Subscribe below and receive lean, six sigma, operations, supply chain, logistics, distribution and business terms in your mailbox.

    CLICK HERE TO SUBSCRIBE

    Categories

    All
    #
    01. Add A Term
    3D
    3PL
    3P's
    5 Principles
    5S
    5 Why's
    6σ
    8 Wastes
    A
    B
    C
    D
    E
    F
    G
    H
    I
    J
    K
    L
    M
    N
    O
    P
    Q
    R
    S
    T
    U
    V
    VSM Shapes
    W
    X
    Y
    Z

    Archives

    January 2023
    December 2022
    November 2022
    October 2022
    September 2022
    August 2022
    July 2022
    June 2022
    May 2022
    April 2022
    March 2022
    February 2022
    January 2022
    December 2021
    November 2021
    October 2021
    September 2021
    August 2021
    July 2021
    June 2021
    May 2021
    April 2021
    March 2021
    February 2021
    January 2021
    December 2020
    November 2020
    October 2020
    September 2020
    August 2020
    July 2020
    May 2020
    April 2020
    March 2020
    November 2019
    October 2019
    August 2019
    July 2019
    June 2019
    May 2019
    April 2019
    March 2019
    February 2019
    January 2019
    December 2018
    November 2018
    October 2018
    September 2018
    August 2018
    July 2018
    June 2018
    May 2018
    March 2018
    February 2018
    May 2017
    April 2017
    March 2017
    February 2017
    January 2017
    December 2016
    November 2016
    October 2016
    September 2016
    November 2015

Lean Strategies International LLC.
Follow Us on YouTube or Our Other Channels Below.
             ©2015-2021 Lean Strategies International LLC.  
  • Home Page
  • Services
    • Training >
      • Waste Training
      • Introduction to Lean
      • Lean Champions >
        • Lean Six Sigma White Belt
        • Lean Six Sigma Yellow Belt
      • Lean Tools You Can Use Series! >
        • The 5S System
        • The ©Gemba Methodology
        • The FISH Methodology
        • The CURE Methodology
        • Quick Changeover with REDUCE
        • Mistake Proofing and the Poka Yoke System
        • The Just in Time System
  • Lean Resources
    • Listen to The Gemba
    • Glossary
    • Lean and Six Sigma Quotes
    • Recommended Reading
    • Events
    • Masters of Lean and Six Sigma
    • Career /Jobs
  • Store
    • Workspace
  • Home Page
  • Services
    • Training >
      • Waste Training
      • Introduction to Lean
      • Lean Champions >
        • Lean Six Sigma White Belt
        • Lean Six Sigma Yellow Belt
      • Lean Tools You Can Use Series! >
        • The 5S System
        • The ©Gemba Methodology
        • The FISH Methodology
        • The CURE Methodology
        • Quick Changeover with REDUCE
        • Mistake Proofing and the Poka Yoke System
        • The Just in Time System
  • Lean Resources
    • Listen to The Gemba
    • Glossary
    • Lean and Six Sigma Quotes
    • Recommended Reading
    • Events
    • Masters of Lean and Six Sigma
    • Career /Jobs
  • Store
    • Workspace