White Papers Commodity Management and ERP | Page 4

Commodity Management and ERP

A ComTech Advisory Whitepaper

ENTERPRISE RESOURCE PLANNING
Given the complexity of their operations, many producers and processors of raw materials have invested at some
time in the past in Enterprise Resource Planning (ERP) solutions to better monitor and manage their business processes. An ERP system integrates multiple business functions such as planning, inventory/materials management,
engineering, order processing, manufacturing, purchasing, accounting and finance, human resources, and more,
providing a number of tangible and considerable benefits. However, in order to realize these benefits, the ERP
system must be fully integrated and highly configurable, providing its users insights into operational and financial
performance that would otherwise be unavailable.

As a mature class of software, ERP solutions are
well equipped to capture complicated or large
data structures such as commodity contracts, and
agreements, in industries where the materials pricing is dependent upon a number of quality criteria.
Furthermore, the ERP solution is able to manage a
wide variety of other common problems facing physical commodity producers and processors, including sophisticated document management around
shipping and logistics, tracking inventory in multiple locations, producing interim and final invoices
once final pricing is available, and ensuring proper
accounting treatment of such activities. In fact, the
twenty-year or more history of the ERP software

category ensures that ERP platforms can handle a very wide variety
of requirements across many industries including those dealing with
physical commodities.

Increasing price volatilities in commodity markets have, however, changed the nature of the game for virtually all large-scale processing and manufacturing companies as both feedstock and energy costs
move unpredictably. Producers and processors of both raw materials
and finished goods increasingly find themselves trapped in the middle
of volatile prices on one side and an inability to raise prices on the other.
Mar gins are squeezed and profits become increasingly unpredictable.
Fortunately, however, there are a number of solutions to this dilemma
that include different approaches to production planning in addition to
the use of improved hedging and risk management techniques.

COMMODITY MANAGEMENT –
THE NEXT STEP
Hedging and price optimization for purchase and sales agreements requires integrated and real-time access to
derivative and commodity prices across a variety of exchanges, giving users the ability to use these prices alone, or
in combination using a formulaic structure, to price transactions.

Commodity pricing adds an entirely new dimension
to pricing raw materials, as it requires referencing
a quoted price for a standard financial instrument
where that price may not actually be available or finalized until some point in the future. Furthermore,
© Commodity Technology Advisory LLC, 2014

the system must be able to process all of the different types of financial
instruments in terms of execution, settlement, accounting and regulatory compliance needs.

Active risk management further requires the ability to analyze
positions in real-time via drill-down capabilities into that physical and/or