Now, the chip pricing to its favor

Now, let’s explore the strategies how the three
companies manage their exposure to commodity price risk. From AAPL’s 10K we
find that although most components essential to AAPL’s business are available
from multiple vendors, certain key components viz., microprocessors, liquid
crystal displays (LCDs) and certain optical drives are sourced from a single vendor/supplier.
This exposes AAPL to supply and pricing risks as well as concentration risk. AAPL’s
risk exposure to commodity risk in 2016 was $425 million which is 0.2 percent
of its net revenue. In order to effectively manage its risk exposure AAPL
enters into agreements with its suppliers for favorable pricing.  As AAPL orders tens of millions of DRAM and
NAND chips at a single time which helps keep the cost for AAPL within
threshold, however with such a high volume of memory being sucked-up by a
single company it drives up the cost for the rest of the market. Lately AAPL
through Bain Capital has purchased Toshiba’s prized memory chip business for
$18 billion1
which gives AAPL a lot of leverage in adjusting the chip pricing to its favor
in the technology hardware landscape.

Next, HPQ’s exposure to commodity price risk in 2016
was $120 million, which is equal to 0.3 percent of its revenue. We found that
HPQ’s strategic response to the risk is multifold2: a)
HPQ purchases memory components strategically in advance of demand to take
advantage of favorable pricing, b) HPQ enters into binding long-term purchase
commitment with its suppliers, and finally c) HPQ procures from suppliers
offering pricing discount for firm’s procurement quantity commitments.

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


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