Safeguard and maximize your bottom line by using a CMS along with your ERP for raw material procurement
Raw material procurement is a fundamental aspect of the supply chain for many industries. It involves sourcing various materials, such as agricultural commodities, oil-based products, metals, plastics, and chemicals.
In a world where costs cannot be transferred to end consumers easily, efficient procurement strategies are vital for securing raw materials and logistics assets, maintaining cost-effectiveness, and ensuring the quality of final products.
This blog highlights how managing raw material spend, coverage, and commodity price risk with a Commodity Management Solution (CMS) can complement your Enterprise Resource Planning (ERP) system, safeguarding and maximizing your bottom line.
Four reasons why a commodity management solution can augment your ERP
ERP systems are reliable workhorses for many manufacturing businesses, harmonizing various operations seamlessly. They excel in accounting and data management but falter in unpredictable financial markets and volatile commodity prices.
This shortcoming is noticeable in raw material procurement, where market risks can significantly impact your net profits. Let’s look at why you need a CMS to augment your ERP.
Focus on financial derivatives and hedging
Financial derivatives are critical in commodities trading and procurement as they allow market participants to manage commodity risk by hedging against price fluctuations. Some examples of these financial instruments are futures and options contracts, which derive their value from underlying commodities such as oil, metals, or agricultural products.
However, commodity markets are complex and influenced by various factors, including geopolitical events, weather conditions, supply and demand dynamics, and currency fluctuations. It is essential to hedge against these extrinsic influences. Commodity derivatives also require careful consideration of expiration dates, strike prices, and volatility levels, making risk management challenging.
CMS excel in hedging these market risks. They specialize in the trade types commonly used in financial markets to facilitate hedging, setting, or keeping the delta of a portfolio as close to zero as possible, and minimizing potential losses. Many CMS also provide seamless connectivity to exchanges, market prices, and insights for a real-time market view.
Effective commodities risk management and financial decision-making involve managing positions, risk, and Value at Risk (VaR). ERP systems can handle quantity risk through vendor evaluations and execution strategies, but they often fail to manage price and cost risk. Such risks involve diverse instruments ranging from long-term contracts to financial derivatives like futures, swaps, and options, which have complex metrics (like Greeks in the case of options).
Managing your position to mitigate price risk requires constant monitoring, adjusting your portfolios, and balancing physical risk positions with hedging instruments. It involves strategic asset allocation, diversification, and maintaining a balance between covered and uncovered spend. VaR management assesses potential spend swings quantitatively in adverse market conditions, offering a snapshot of the maximum expected swings and informing risk tolerance levels.
A CMS specializes in forward-looking strategies for spending, coverage, and risk management, encompassing forecasting, negotiating supplier pricing agreements, and supporting both fixed and floating price components. It caters to the specific nuances of various commodity markets and also supports VaR management.
Hedge accounting helps companies manage financial statement fluctuations caused by asset or liability value changes. Businesses can report gains and losses from hedging activities simultaneously, avoiding sudden financial statement swings in interest rates, currency exchange rates, and commodity prices.
Documenting hedge relationships, effectiveness testing, and adherence to accounting standards like International Financial Reporting Standards (IFRS) or the Generally Accepted Accounting Principles (GAAP), ensures clear and accurate financial reporting.
ERP systems only partially support hedge accounting: they tend to focus only on hedge accounting for currencies, not on financial derivatives of commodities. A CMS helps bridge the gap by considering the latter.
Light and risk-free implementation
As already mentioned, effectively managing spend, coverage, risk, and financial derivatives of your raw material procurement is complex, but it can be highly standardized. The process can be achieved swiftly at implementation, as a CMS often comes with preconfigured packages to speed up the implementation time and effort.
Whether you implement your CMS stand-alone, in parallel, or after implementing your ERP, it remains a light and risk-free process. With fewer integration points, the transition is simple, allowing you to get up and running fast.
Maximize financial margins with the powerful combination of ION SPP and your ERP
Although ERPs are known for their robustness and versatility, their broad approach does not meet the specific demands of commodity-intensive firms. On the other hand, a CMS such as ION SPP integrates both physical raw material coverage and financial commodity price coverage, using a set of raw material forecasts and cost models.
The best strategy is not about choosing a CMS over an ERP system. Using a CMS like ION SPP and an ERP system in tandem can be a powerful strategy for businesses aiming to optimize their spend predictability. Each platform brings distinct strengths, and their combination can create a synergy that fosters better decision-making and efficiency.
ION SPP streamlines raw material, packaging, and energy procurement, providing a complete coverage and spend management. With ION SPP, you will have total awareness of spending always by forecasting, hedging, and managing costs and supplier contracts all in one place.
Here are some benefits of using ION SPP with an ERP. It:
- Provides advanced exposure reporting and hedging instruments essential to managing volatile market prices, helping to minimize commodity price risk, and implement cost-effective procurement strategies.
- Simplifies your raw material procurement by capturing and aggregating forecasts. It then breaks them down into measurable commodity price risks — providing market insights, comprehensive risk calculations, and real-time position management. With this, you can monitor your material costs and spending, gaining clear visibility across the entire commodity value chain.
- Provides a breakdown of prices into floating and fixed price and cost components to measure price exposure and coverage for each cost component separately.
- Offers full support of price fixing agreements and derivative hedge instruments that reflect the covered quantity and price of the market-driven cost components. The functionality includes timely mark-to-market valuation, settlement and broker reconciliation process automation, position management, limits monitoring, and compliance reporting.
- Supports volume and spend coverage, reporting by material type or cost component. It also offers a versioning process that allows users to track changes in coverage over time.
- Provides a holistic view of covered and uncovered spend, quantities, and rates.
- Consolidates data across the value chain and provides real-time insights into key performance indicators such as quantity, price, and spend, performance versus market, to-buy-cash, and total ownership positions. What’s more, it empowers you to make smarter and faster decisions.
Relying only on your ERP system for raw material procurement exposes your business to several risks. A CMS like ION SPP offers specialized tools and real-time insights tailored to this field. Combining an ERP’s broad operational capabilities with ION SPP’s specialist strengths will safeguard and maximize your bottom line — optimizing your operations, enhancing supply chain control, and fostering data-driven decisions.
Whether you’re looking for an expert’s guidance or are eager to explore the possibilities, take the next step by reaching out to us today or downloading our brochure. Your bottom line deserves the best defense, and ION SPP is here to deliver just that.
Check out our other blog:
Address the challenges and complexities posed by raw materials, packaging, and energy procurement
Businesses worldwide already benefit from SPP’s procurement, risk, and advanced decision-making support. You can benefit, too.