Commodity producers, converters, and consumers all struggle with price volatility. Over the last 12 months the Commodity Metals Price Index is down 18.83%, Gold is up 11.48%, and Natural Gas is down 53.9%. In the last 5 months, gasoline prices have increased 13.57%. These are by no means small numbers, and extreme commodity price fluctuations can seriously impact your bottom line.
Market dynamics are fueling commodity price volatility across the globe. Increasing demand in emerging markets like China, India, and Brazil have put pressure on the global supply of many commodities. Geopolitical uncertainties and natural disasters around the world disrupt supply chains and fuel demand, while the rising influence of hedge funds and the increased involvement of major financial institutions can also play havoc with commodity pricing. Price volatility can be significantly higher for commodities than it is for most currencies or interest rates.
What does all this mean for the typical industrial machinery and component manufacturer?
- Calculating and managing the material cost for end products can be extremely difficult
- Liquidity and cash planning can be extraordinarily problematic
- Predictable profitability can be tremendously challenging
- Hedging with financial derivatives becomes a “must have” strategy
Driven by the need to protect earnings and keep company operations running profitability, crisis-shaken manufacturing, supply chain, and purchasing executives are increasing their focus on commodity risk management. Companies are also struggling to keep up and comply with hedge accounting laws and government regulations like Sarbanes Oxley or the International Financial Reporting Standards (IFRS).
Because of all these challenges, there is a strong need for business solutions which are designed to manage price volatility, mitigate risk, and meet regulatory requirements in regard to commodities.
SAP can help.
Some of our customers have:
- Substantially improved visibility of commodity price exposure
- Created more reliable profitability and risk reports
- Developed higher hedge accuracy
- Greatly reduced the time and effort associated with regulatory compliance
SAP’s Commodity Management Solution covers the entire end to end business process of procurement, sales, and treasury including invoicing, complex commodity pricing, logistics, hedge management, and reporting. The solution also offers:
- An integrated platform with open interfaces
- Direct transfer of physical sales and purchasing data to the treasury solution
- Fully-integrated physical pricing rules and calculation engine
- Complete audit support
- A comprehensive risk reporting tool
The SAP Commodity Management solution SAP helps you save costs and gain efficiencies in the purchasing and sales of commodity-dependent products, increase the speed of commodity price and risk hedging, and improve transparency of information across multiple business units.
You can capture commodity sales or purchasing contracts with commodity price definitions based on market quotes like index-based commodity pricing. You can also streamline the invoicing or payment processes by enabling automated provisional, differential, and final invoicing, which helps eliminate revenue leakage caused by invoice miscalculations on the sales side or overpayment of vendor invoices on the procurement side. The solution also allows you to fully automate price calculations, so complex manual processes become a thing of the past, increasing efficiency of your buyers or your salespeople.
From a commodity risk management perspective, you can accurately identify and measure commodity price and currency exposure and take the appropriate steps to mitigate these risks. You can also efficiently manage and reduce market risk arising from commodity price volatility with real-time views of physical commodity positions. The solution also helps you streamline treasury processes and reduce the resources required to execute an order, so your buyers, salespeople, or risk managers can concentrate on higher value-add activities. And since the solution offers complete audit support and “one single version of the truth,” you can help ensure compliance with the newest regulations around hedge accounting.
Whether you are a commodity producer, converter, or consumer, don’t let price volatility drive you crazy any longer. SAP’s Commodity Management Solution can absolutely help you run better.