Last updated: July 25, 2019
Topic: BusinessCompany
Sample donated:

Now, let’s explore the strategies how the threecompanies manage their exposure to commodity price risk.

From AAPL’s 10K wefind that although most components essential to AAPL’s business are availablefrom multiple suppliers, certain key components viz., microprocessors, liquidcrystal displays (LCDs) and certain optical drives are obtained from a single vendor/supplier.This exposes AAPL to significant supply and pricing risks as well asconcentration risk. AAPL’s risk exposure to commodity risk in 2016 was $425million which is 0.2 percent of its net revenue. In order to effectively manageits risk exposure AAPL enters into agreements with its suppliers for favorablepricing.  As AAPL orders tens of millionsof DRAM and NAND chips at a single time which helps keep the cost for AAPLwithin threshold, however with such a high volume of memory being sucked-up bya single company it drives up the cost for the rest of the market.

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Lately AAPLthrough Bain Capital has purchased Toshiba’s prized memory chip business for$18 billion1which gives AAPL a lot of leverage in adjusting the chip pricing to its favorin the technology hardware landscape.Next, HPQ’s exposure to commodity price risk in 2016was $120 million, which is equal to 0.3 percent of its revenue. We found thatHPQ’s strategic response to the risk is multifold2: a)HPQ purchases memory components strategically in advance of demand to takeadvantage of favorable pricing, b) HPQ enters into binding long-term purchasecommitment with its suppliers, and finally c) HPQ procures from suppliersoffering pricing discount for firm’s procurement quantity commitments.Lastlywe explore the strategy that Lenovo has in place to offset its commodity pricerisk exposure.

Lenovo’s risk exposure to commodity price risk in 2016 was $516million, which is 1.2 percent of its revenue. Its measures include: a) dynamicallyadjust pricing and sourcing decision in response to random cost changes and b)Lenovo would pass on the price to its consumer, typically by reconsideringpricing of PCs to adjust higher component pricing.