Natural hedging as a risk prophylaxis and supplier financing instrument in automotive supply chains

Abstract

PurposeSupply chain risks significantly endanger small and medium‐sized enterprise (SME‐) suppliers in different currency areas in purchasing and sales. The purpose of this paper is twofold: to describe the concept of natural hedging in supply chains, and to highlight the potentials of natural hedging as a risk prophylaxis and a supplier financing approach.Design/methodology/approachThe paper uses a brief literature review and a conceptual research design, taking the financial and physical component of natural hedging (in this case between an OEM and its SME‐suppliers in the automotive industry) into consideration.FindingsNatural hedging of currency and commodity price fluctuations can contribute to the reduction of SME‐suppliers' supply chain vulnerability, also benefiting an OEM.Research limitations/implicationsThis research focuses exclusively on relationships between SME‐suppliers and large OEMs in the automotive industry. Studies of other types of companies and industries, such as the capital goods industry, might reveal divergent practices.Practical implicationsWith the natural hedging approach, the paper promotes an innovative concept for better managing risks in supply chains, especially in recessionary times. The concept is a source for supplier financing.Originality/valueThis research shows that a globally active focal firm – an OEM in the automotive industry, for instance – can hedge currency and commodity price risks (financial components), as well as operational supply risks (physical components), by centralizing commodity supply with its SME‐suppliers. It can serve as a basis for future research.