Optimizing supply chains: Hedging risks with artificial intelligence

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Global changes are in full swing. Supply chain disruptions, decarbonization, an increasing digitalization lead up to a shift of capital flows. Global trends are having effects on states and entire organizations. How can organizations align themselves advantageously now? Michael Hüther of the Institut der deutschen Wirtschaft Köln (iwKöln) / German Economic Institute (IW) recently published a study on how current megatrends can influence and even change existing structures. For highly specialized companies in particular, fundamental change usually represents a major challenge. This makes it all the more important to identify the opportunities in the current changes.

Pressure on supply chains: high diversification is both a threat and an opportunity

Pressure on supply chains has increased around the world. The challenges of relying on suppliers and receiving commodities securely have grown. A Corona-related lockdown of a major container port in China is enough to squeeze and impact supply chains in Western countries. But according to Hüther, this view is too limited. After all, supply chains not only serve to provide access to advantageous purchasing prices while taking advantage of international specialization. At the same time, highly diversified supply chains also provide a hedge against economic volatility. Used in the right way, they also offer the opportunity to become independent of certain suppliers or the geostrategic behavior of entire countries. According to the study, almost half of the companies in Germany would react by diversifying their supply chains more.

Opportunities exist through higher digitalization of supply chains with modern systems such as Artificial Intelligence

The last waves of globalization were only made possible by decreasing communication and administration costs. Just-in-time production, for example, was only able to develop on a broad scale when the costs of implementation became acceptable. From it Hüther concludes that a renewed lowering of information costs in the data processing and the data management in the international procurement by modern supply chain systems can lead to a renewed lowering of costs. Thus it could come again to an intensified international interaction. However, Hüther also sees the additional challenges that an introduction of modern supply chain systems based on artificial intelligence poses to companies. Leaving the benefits to only a few courageous and disruptive companies, however, is not expedient, he says. Hüther sees enormous potential in the greater use of modern supply chains. Above all, a resulting reduction in transport and storage costs and transaction costs could have a beneficial effect. So the question is not whether increased digitization of supply chains makes sense or is necessary. The question is, can we really afford to do without it? And if so, for how much longer?

21strategies: Hedging commodity price risks with artificial intelligence

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Hüther, Michael und Diermeier, Matthias. (2022). Globalisation under pressure? How current megatrends shape the patters of international trade, capital flows and technology diffusion. In: Ernest Gnan/Christoph Schneider/Claudia Stowasser (edit.). Schwerpunkt Außenwirtschaft 2021/2022, Reglobalisation: Changing Patterns. https://www.iwkoeln.de/studien/michael-huether-matthias-diermeier-how-current-megatrends-shape-the-patters-of-international-trade-capital-flows-and-technology-diffusion.html (12.08.2022)

Author: Tanja Zimmermann