Managing Commodity Price Volatility, Pricing and Risk
Nearly all manufacturing-related companies interact with the broader commodity market, whether they produce basic commodities to sell, buy and use commodities to make products from components to finished consumer goods, or both. For these companies, high price volatility in raw materials has a direct impact on their top or bottom line and their ability to plan.
Because most companies cannot quickly transfer higher raw material costs to their customers, companies are getting squeezed more and more as the volatility keeps increasing. Volatility in global commodity markets is a result of a number of factors, such as changes in global demand and the fact that supply is being driven by emerging economies.
Other factors include the increasingly global economy, political instabilities, and the increase in natural disasters. Together, these factors make price volatility in commodities a global problem that’s expected to worsen over time. It’s critical that you take a holistic view of your commodity-related business in procurement, sales, and risk management. You need to quickly identify risks and manage short- and long-term pricing.
To do business in commodity markets, you need to quickly and accurately identify and hedge risk exposures, whether they stem from planned demand, sales, purchase contracts, or held physical commodity positions. You also need to manage and optimize short- and long-term raw material pricing. To achieve this, you need a solution that integrates processes impacted by commodities. This will allow you to get full information about your commodity business and insights that will help your company optimize profitability despite challenges in global commodity markets.
SAP Innovations
Commodity management solutions from SAP provide ways for you to analyse your commodity business in real time and perform profitable commodity purchasing, selling, and risk management:
- Reduced impact of volatility in raw material prices
- Increased number of commodities hedged
- Increased reliability of medium- and long-term plans
- Real-time consolidated reporting of net-open commodity positions
- Automated, complex commodity pricing calculations
- Minimized exceptions to corporate risk policy
Database and technology solutions powered by the SAP HANA platform enable your commodity professionals to monitor high volumes of commodity transactions, both physical and paper derivatives, in real time. So you can quickly react to market changes and reduce overall commodity risks.
Analytics solutions provide a 360-degree view of your business. You have the ability to manage your commodity positions on a real-time basis based on your unique risk approach.
Mobile solutions give commodity managers always-on access to status reporting, exceptions, and alerts, ensuring quick response, better decision making, and reduced risk.
Commodity Management Process Map
Commodity management is an end-to-end business solution that optimizes commodity procurement, commodity sales and commodity risk management.
Commodity Management Process Map
Efficient Commodity Procurement
SAP Commodity Procurement enables companies to efficiently create procurement contracts and purchase orders for commodities. You can create quantity contracts for defined periods, maintain commodity quality requirements, and link pricing formulas including price calculation rules. The software also prices commodities using data from exchanges such as NYMEX, LME, CBOT, MATIF, or others.
In addition, you can create call-off orders with references to contracts, create spot purchases, and reprice orders using quality factors and formulas from the original contract. Provisional and differential invoicing allows you to post invoices before all prices and qualities have been determined and full payment is possible – and even before delivery. And you can do all this without the subsequent hassle of creating multiple debit and credit notes.
Treasury integration allows you to transfer accurate commodity exposure positions to risk management in real time. Companies get a clear view into the physical positions of commodities, a streamlined process for pricing and settling commodities according to market conventions, and the ability to manage risk in times of high volatility.
Commodity Sales
The SAP Commodity Sales application is designed to run the complete contract-to-cash process, including logistics and settlement of commodities. The solution gives you extended ERP functionality to handle commodity-based contractual pricing; provisional, differential, and final invoicing; and integration with your treasury so you can transfer commodity exposure positions to risk management.
It also gives managers the ability to maintain negotiated pricing rules in the system. These rules are used to automate price calculations and enable the pricing of commodities based on frequently changing market quotes.
Commodity Risk Management
SAP Commodity Risk Management integrates tightly with SAP Commodity Procurement and SAP Commodity Sales to automatically capture exposure positions from forecasts or physical transactions and then compile risk positions. Financial hedging transactions are captured and used to update the appropriate risk positions. To manage these paper trades, the software allows you to import and store market prices, handle confirmations and counter-confirmations, and ensure segregation of
duties.
Hedge management lets you define hedge plans, maintain hedging relationships, measure the effectiveness of hedges, and post hedge accounting results to the general ledger. Robust commodity risk reporting analytics give you a view into risk positions and risk policy compliance in real time.
Why SAP?
Integrated commodity management solutions from SAP help you optimize commodity procurement, sales, and risk management processes. You gain a consolidated, real-time view of your commodity business so you can react quickly to market changes.
Tightly Integrated, Comprehensive Solution
Directly transfer procurement and sales information to SAP Commodity Risk Management so you
can optimize commodity price hedging.
Improved Commodity Pricing
Define rules for processing physical commodity deals leveraging a fully integrated price calculation
engine.
Better Reporting and Legal Compliance
Gain real-time data collection and reporting, plus information integration with finance and
accounting.
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