Supply and demand hedging strategies in Japanese commodity futures markets

Economics

This project will discuss the different hedging needs of Mercedes-Benz in Japan. The company sells its cars in Japan, but does not produce them in that market. One of the key demand hedging strategies for the company is vertical integration.

The demand in the Japanese market is relatively stable, but Mercedes wants to ensure a relatively low level of inventory, because inventory sitting on lots is an inefficient use of working capital. In addition, cars depreciate over time and a year-old car on a new car lot will need to be discounted in order to be sold. To avoid this, the company must carefully manage its inventory levels. Vertical integration in this sense reflects control over the company's distribution channels (Investopedia, 2012).

The vertical integration strategy involves owning the dealerships that sell the cars. This makes it easier to estimate demand. In addition, there is no incentive for the company to over order. Lastly, this form of vertical integration allows unsold vehicles to be returned in a smooth process that minimizes the costs to the company. In addition, the dealerships can have a higher knowledge of the product when they are owned by the company. Thus, vertical integration can help Mercedes to exert control over the demand in the Japanese market.

Customers in Japan will also benefit from this vertical integration, in a few ways. The first is that the company will be able to cycle excess inventory out of the dealerships. This means that the dealer has less incentive to move old stock off the lot, so the company-owned dealership is likely to be more responsive to customer needs in that respect. In addition, the company will be able to gather more information about the customers when it is able to deal with them directly. Under a franchise dealership system, Mercedes would know little about the end user, but vertical integration would give the company direct access to the end user. This allows Mercedes to develop better products and better financing options in order to better meet customer needs.

Supply hedging strategies are another area of concern for Mercedes. In the Japanese market the industry is characterized by intense competition but also slow growth. Mercedes therefore needs to ensure that it has adequate supplies to meet demand, especially if a product becomes successful. It is reasonable that to ensure key inputs, Mercedes should adopt a policy of using contracts with its suppliers. Mercedes needs to ensure that it has preferential access to key parts and components that might be required to service customer vehicles, but also for new vehicles as well. Mercedes needs to produce vehicles for the Japanese market well in advance because of the shipping times, so it is essential that it has guaranteed contracts for the provision of critical parts. In this case, vertical integration also has merit, because that approach would give Mercedes greater control over its supply chain. With this level of control, the company will be in a better position to manage the supply of automobiles on the Japanese market.