White Papers Consumer Product Companies Smart Commodity | Page 4

Commodity Management

A ComTech Advisory Whitepaper

sophisticated then consumer product companies and build in very large risk premiums when required to fix prices. The use of
financial derivatives is typically the best risk management alternative for CP companies, but only 28% mentioned the use of
financial hedging.
Many of these businesses have necessarily focused on driving out costs from the supply chain. However, this has not
addressed the real underlying and persistent problem of price volatility and the huge risk that this presents to their
businesses. A number of these companies have therefore turned to ‘commodity management’ as an activity that they need
to actively introduce, manage and utilize to help reduce the risks to their businesses now and into the future.
For many, utilizing commodity management represents a shift in both culture as well as business processes. Rather than
procuring commodities traditionally using demand forecasts in a just-in-time manner and setting prices at time of purchase,
delivery or some point in between, commodity management adopts a more proactive trading approach. This helps manage
price exposures and risks to the business more effectively. In order to be able do this, much more sophisticated tools are
required that can provide the right information on a timely basis to support business decisions. Part of this cultural shift
involves measuring procurement performance against market as opposed
to plan or budget.

Solutions do exist and are

A commodity management solution needs to be able to handle multiple
commodities and raw materials. It needs to be able to integrate with ERP
already in use by some leading
and other systems to pull in production, procurement and other data and it
consumer product companies,
needs to be able to allow ‘traders’ to make decisions and capture spot
but in the main, they suffer
trades, longer-term purchase contracts and so on, tracking position and
mark to market in the process. Finally, the solution needs to be able to
from older technology
provide hedge effectiveness functionality and all of the required regulatory
platforms and lack agility.
reporting. Solutions do exist and are already in use by some leading
consumer product companies but in the main, they suffer from older
technology platforms and lack agility. They are essentially transaction management solutions that focus on monitoring and
reporting. Other businesses rely on uncontrollable spreadsheets that are themselves a massive risk to the business.
Since existing solutions are mostly built on older technology platforms, they also are expensive to deploy and periodically
upgrade. Implementations can take many months if not years depending on the complexity of the business. The monolithic
and traditionally developed code base is difficult to maintain, making quality assurance cycles very lengthy, slowing the ability
to bring on board new functionality quickly.

The Future of Commodity Management
Though commodity management has gained a following as a new approach to managing raw material price volatility, it is still
in it’s infancy with respect to the solutions available and what these systems can deliver. Today’s solutions might be termed
‘commodity management v1.0.’
The next step in delivering commodity management solutions involves the ability to deliver agility, flexibility, decision support
and predictive analytics. Version 2.0 commodity management solutions will need to be based on an entirely different
technology stack to achieve this and provide significantly enhanced usability and adaptability including:
•

•

The solution needs to assist users make informed decisions by transforming large amounts of data to insights by
providing predictive and user controllable analytics. This means that the user interface needs to provide strong and
intuitive visualization tools in order to optimize activities and simulate alternative strategies.
Utilization of component and service oriented architectures while being web-enabled. Solutions built on these
modern technologies provide the vendor with the ability to deliver upgrades to the user faster and with significantly
less disruption and cost to the business while ensuring a significantly lower total cost of ownership. They can be
delivered on premises, as a hosted solution or in the cloud.

© Commodity Technology Advisory LLC, 2014

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