Case | HBS Case Collection | December 2008 (Revised February 2017)
David E. Bell and Mary Shelman
In 20 years, Sunny Verghese had built Singapore-based Olam International from a small Nigerian export company into a $5 billion global leader in agricultural commodities with a core competence in Africa. Olam's growth had come by pursuing product and geographic adjacencies, and its “farm gate to factory gate” approach had been extended to 14 agricultural products, including cashews, sesame, cocoa, and coffee. In mid-October 2008, Olam's stock price declined to $1 a share from a high of $3.71 in early 2007 as part of the global economic crisis. Verghese had to decide whether to change the firm's strategy based on the new economic environment.
Keywords: Financial Crisis; Trade; Growth and Development Strategy; Supply Chain; Expansion; Agriculture and Agribusiness Industry; Africa; Singapore;
Olam International Limited
The report presents a case about Olam International, one of the leading agri-business and food company, which has a possession in around 65 countries. Since its incorporation in 1989, the group had evolved from a single-product to a multi-product company. The organization has five business segments which include: edible nuts, spices and beans, confectionary and beverage ingredients, food staples and packed foods, industrial raw materials and commodity financial services.
The group had enjoyed tremendous growth over the past few years by focusing on supply chain management of agricultural products and other food ingredients, which benefited the organization to serve across the globe. In February 2005, Olam International had obtained a listing on the Main Board of Singapore Exchange. The group’s strategy was to grow through organic and inorganic acquisitions, which helped the organization in improving its supply chain and also strengthen the organization’s competitive position to compete across the globe.
The strategic view of the organization is to enhance the value of the shareholders by delivering sustainable agricultural products across the globe. The group had also launched Olam Livelihood Charter (OLC), in order to improve the wellbeing of rural communities so as to make farms commercially feasible.
Evaluation of the risk management techniques
Commodity price risk refers to adverse changes in the commodity price which can substantially threaten the cost of the commodity; hence profits may deteriorate. Olam international is susceptible to commodity price risk because the group offers long range of products which are subject to a change in economic condition, environmental variations which increases the risk of unavailability of raw material or the commodity may be be available at relatively higher price, so it is very important for Olam to execute risk management techniques in order to mitigate the risk of changes in commodity price and increase the value of shareholders. Further, it is very important for the group to manage the commodity price risk because if the group is unable to manage its commodity price; then it will increase the overall cost of the goods, hence this will deteriorate the overall profits.
The importance of managing commodity price risk can further be justified from the action that the flood in Australia increases the global shortfall of most agricultural products, which resulted in an increase in the commodity price and raised difficulty for most of the agricultural organizations to suffer adverse effects of commodity price (Berry, 1998, 54).
The group in order to manage the commodity price risk purchases and sells various derivative instruments, especially the futures and options in order to avoid adverse effects of price fluctuations. Further, the group had also restricted unhedged fixed price physical condition in each commodity.
The portfolio of Olam is comprised of two types of products. The first one is the future traded products, such as sugar, grain, cotton, cocoa, and coffee. The second one is non-future traded products, such as dairy products, edible nuts, sesame, and rice. The group takes initiative steps in order to mitigate the commodity price risk. The commodity price risk of non-future traded products are managed through the use of forward contracts to authentic reliable counter parties.
One of the strength of the forward contract is that the supplier is obliged to deliver the commodity at the contractual price and at the designated time; hence this reduces the adverse effect of change in commodity price but on the other hand, it has some drawbacks as well because the supplier is obliged to deliver the commodity at contractual price and if the price of the commodity is decreased at an instant market than previously contracted with the supplier, then the organization will have to accept the commodity at the contractual amount. Further, the price negotiated with the supplier is based on future predictions, which increases the risk of volatility of assumptions. (Canova, 1993, 25)
Olam International Case Solution
One other factor that Olam may face in executing forward contracts is that the suppliers of the group are mostly the farmers which may resist from entering in to a contract with the group. Further, one other drawback that Olam can face is a difficulty that the suppliers may oppose to fulfill contractual obligation to deliver the commodity when the price increases, which may deteriorate the relations with supplier and may increase the cost of litigation against supplier to fulfill contractual obligation (Phelan, 1997, 19).
Credit risk arises when the counter party fails to provide funds to which it was contractually obliged. Olam is susceptible to credit risk because the group offers wide range of products to around 13,600 customers worldwide, which increases the risk that the funds may not be realized or may be realized less, so it is very important for the organization to adopt an appropriate risk management policy in order to avoid any adverse effects on the cash flows.
In order to manage the credit risk, Olam performs an in-depth assessment of its customers and the counter parties are assigned a credit rating. The group also considers the credit worthiness and financial background of the customers and assigns them a score on the basis of the group’s assessment. Further, the group also limits the sale to the counter party and the group has implemented a policy that the sale to a single counter party should not exceed 5% of the total group’s sale......................
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In 20 years, Sunny Verghese was built Olam International of Singapore's exports of small Nigerian companies in the $ 5 billion global leader in the field of agricultural production, the focus in Africa. Olam growth came in carrying products and geographical proximity and its "farm gate to factory gate" approach was extended to 14 agricultural products, including cashew nuts, sesame seeds, cocoa and coffee. In mid-October 2008, the price of shares Olam fell to $ 1 per share of $ 3.71 in early 2007 as part of the global economic crisis. Verghese had to make the decision to change the company's strategy for the new economic conditions. "Hide
by David E. Bell, Mary Shelman Source: Harvard Business School 32 pages. Publication Date: December 16, 2008. Prod. #: 509002-PDF-ENG