Question 121 - CPIM-Part-2 discussion

Hedge is a risk management strategy that assumes that losses in one part of the supply chain will be offset by gains in another. Hedge is a method of reducing the exposure to price fluctuations, currency fluctuations, or other uncertainties by taking a position in a related market or asset that moves in the opposite direction. Hedge helps to protect the profitability and cash flow of the supply chain by locking in the prices or rates at a certain level. For example, a company that imports raw materials from another country may hedge against the exchange rate risk by buying a forward contract or an option that guarantees a fixed rate for the currency conversion.

The other options are not risk management strategies that assume that losses in one part of the supply chain will be offset by gains in another. Flexible is a risk management strategy that allows the supply chain to adapt to changing conditions and customer preferences by using multiple sources, modes, or routes. Fluctuation is not a risk management strategy, but a term that describes the variation or volatility of a market or asset over time. Speculative is not a risk management strategy, but a term that describes an activity or investment that involves a high degree of uncertainty or risk, with the expectation of earning a high return.Reference: CPIM Exam Content Manual Version 7.0, Domain 7: Plan and Manage Distribution, Section 7.1: Distribution Planning Concepts, p. 40; Hedging; Hedging Definition.