In association withPROCUREMENT LEADERS INSIGHTCommodities management
InsIght commodItIes management                heavy users                of raw                materials                fa...
growing range of commodities.              Yet    remarkably,     these        technology    and     processes            ...
InsIght commodItIes managementproduction, technology andoperations management atSpain’s University of NavarraIESE Business...
appear that many of the           are equally unreliable and         already finely balanced.             businesses that ...
InsIght commodItIes managementQ&A: mATeriAL sciencelMichael Schwartz is chiefmarketing officer of Triple PointTechnology. ...
through traditional supplier-        Gartner Research supply             mastering the process through             based  ...
InsIght commodItIes managementjust such a solution and in the   procurement and scheduling           well as when it moves...
InsIght commodItIes management              finance function oversight.”                 What’s more, he says, the        ...
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Triple Point Commodity Management

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Heavy users of raw materials face a huge challenge. The prices of many of the world’s key commodities reached all-time highs last year, and volatility across the markets was more than enough to create huge problems for companies in the industrial manufacturing and consumer products industries.

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Transcript of "Triple Point Commodity Management"

  1. 1. In association withPROCUREMENT LEADERS INSIGHTCommodities management
  2. 2. InsIght commodItIes management heavy users of raw materials face a huge Raw emotions challenge. Commodity-based volatility is affectingDuring Q1 2012, copper a broader group of companies than everincreased by 15%, zincby 16% and platinum by21%. Steel has been on aspiky decline since August2011, while aluminiumclimbed by 15% in Januarybefore falling by the sameamount almost immediately.These are just a handful ofraw-materials used by theindustrial manufacturingand engineering industriesand a smaller exampleof the volatility they areexperiencing. But while 3undoubtedly presentinga challenge, the smartorganisations are lookingto new ways of managingthe procurement of key From fluorescent lamps to since signed agreementscommodities. And these new iPhones and wind turbines with Kazakhstan to ensuretechiques are helping them to computer chips, the 17 future supply.steal a significant march on minerals in the periodic table And it’s not just rare earthsthe competition. of elements colloquially known that are causing concern. Thedavid Rae, editor as ‘rare earths’ find their way prices of many of the world’s into an enormous array of key commodities reached© A Procurement Leaders publication hi-tech products. all-time highs last yearin association with Triple Point Technology. Today, most rare earths and, even if they didn’t, theAll rights reserved. come from China, where the volatility across the marketsPermissions And rePrinTs government has, since 2009, was more than enough toreproduction in whole or part of any tightened export quotas and create huge amounts ofphotograph, text or illustration without brought in anti-smuggling problems for companies in thewritten permission from the publisher isprohibited. due care is taken to ensure regulations. industrial manufacturing andthat the content of this publication is fully China’s monopoly on engineering sector.accurate, but the publisher and printer rare earths has led to a Welcome, in short, to a newcannot accept liability for errors andomissions. huge amount of political world order – one where supply posturing. A diplomatic spat and demand are more finelyPublished by: sigaria Ltd, led to the country blocking balanced than ever before.Unit 5 Tun Yard, Peardon street,London, sW8 3HT, UK exports of the minerals to What’s more, that balance is Japan, with the latter having spread across a wide and procurementleaders
  3. 3. growing range of commodities. Yet remarkably, these technology and processes From arable crops, metals, companies – and many others are creating a significant timber, oil and chemicals, it’s hit by the same difficulties – competitive gap on their peers. not difficult to see startling are not always best prepared But it’s a gap that can be examples of price volatility for the challenges they face. closed through the adoption whichever category you look While the raw materials of widely available tools and at. Nor is it difficult to see in question are highly visible techniques – a gap that a larger the consequences of such volatility in companies’ Commodity risk affects a broader group bottom lines: time and again, there are stark reminders that of companies than those traditionally sharply rising raw material costs can knock profitability. exposed to commodity-based volatility In April 2012, for instance, Swiss agribusiness company within and form a major number of companies than ever Syngenta cautioned that its 2012 proportion of overall product are affected by. results would be impacted by cost, the processes and tools “These days, commodity unfavourable raw material costs. they have are not always the risk affects a much broader Meanwhile spice and condiment most sophisticated. group of companies than manufacturer McCormick saw Instead, a small group of those that were traditionally first quarter profits hit by 3%, leading companies who employ exposed to commodity-based because of higher than expected experienced commodity experts volatility,” says Adrian raw material costs. and make use of sophisticated Done, associate professor of4 Unilever uses scale to drive value creation As one of the world’s leading suppliers of fast- decisions around global coverage.” moving consumer goods, Unilever needs little But as it became increasingly important to gain introduction. The 171,000-employee business has transparency around its commodity procurement operations in more than 100 countries and sales in programme, Unilever sought to put a commodity more than 190, generating revenues of €46.5bn platform in place. in 2011. “We wanted the system to provide better But equally, its portfolio of some of the world’s coverage of our positions and to integrate well with best-known brands—including Knorr, Dove, Wall’s, our other systems,” says van Haaren. “Unilever had Hellmann’s, Vaseline, Omo and Signal—sells into a already installed SAP globally, and we knew that tough marketplace. SAP integrated well with Triple Point. Jointly, Triple The result? Intense pressure to control input costs, Point and SAP provide Unilever with a scalable, to preserve operating revenues and margins. end-to-end solution for sourcing, selling, trading and “Due to the economic environment and price logistics processing related to commodities of volatility, consumer companies have started to any kind.” realise that procurement can help the business in a And the benefits speak for themselves, she strategic way,” sums up Patricia van Haaren, explains. “We need instant visibility into our procurement director for commodities for North financial position for commodity contracts over America, Latin America and Europe. a certain period and the ability to compare it with Organisationally, she explains, Unilever the market,” she says. “For example, if you have has responded by globalising its entire coverage for the last quarter of this year against a buying operation. certain price, you’ll want to know “Leveraging our scale is crucial to drive value how much of that is against your internal sales creation. For example, if you are responsible for price and against the current benchmark price the cocoa portfolio, you are accountable for over that same period. Then you truly know watching the entire market and making your financial position.” procurementleaders
  4. 4. InsIght commodItIes managementproduction, technology andoperations management atSpain’s University of NavarraIESE Business School, and theauthor of Global Trends: FacingUp To A Changing World. The companies in questionare those further along thecommodity value chain,whose exposure comesthrough often complex bills-of-material – involving self-manufactured products andcomponents, as well as thosesourced from suppliers –that contain commodities,without necessarily explicitlycomprising commodities.embedded riskConsider the hundreds orthousands of parts that gointo an automobile, domesticelectrical appliance, computer,or item of electronicsequipment. On their own,each individual component 5may be worth just a handful ofeuros. But each is comprised– wholly or partially – of rawmaterials with a growingand significant commodity movement in question is big in components, will have arisk: steel, aluminium, copper enough to precipitate concerns commensurate impact on(for wiring), gold and rare as to product profitability and product costs.earths (for printed circuit marketplace price elasticity.boards and their components The second scenario Wake up calland semiconductors), petro- impacts businesses when In short, sums up Done – achemical-based plastics and price movements occur that former operations executiveso on. may be far less extreme, at the Ford Motor Company, Termed ‘embedded commo- but with usage levels that and the automotive divisiondities’, these materials pose a are far higher. The result is of parts manufacturer GKN –problem under two scenarios. exposure that is, in aggregate, more and more manufacturers The first comes into play high enough to trigger those are finding themselves inat relatively low usage levels. same concerns as to product unfamiliar territory.As with rare earths at the profitability and marketplace “We are entering a new eramoment, or copper a few price elasticity. when stable, low-cost suppliesyears ago, even though the A manufacturer of earth- of commonplace, everydayamount of material involved moving equipment, for items cannot be assumed,” heis small, price movements instance, is heavily exposed warns. “There are some majorsuddenly become extreme to movements in the price of systemic risks out there thatenough to show up on steel: even a 10% increase in are capable of blowing suchprocurement management’s steel prices, spread across in- assumptions out of the water.”radar – generally, because the house production and bought- Worse still, it would procurementleaders
  5. 5. appear that many of the are equally unreliable and already finely balanced. businesses that are most unlikely to be borne out by Take China, for instance. at risk from embedded subsequent events. According to estimates commodities haven’t yet woken Indeed, there’s a temptation prepared by the UN population up to the fact. to see price volatility as division and investment bank “The only time most exclusively supply-side Goldman Sachs and reported businesses really take notice based – oil price shocks due in Forbes, China will have of the problem is when prices to civil and political unrest; approximately 1.4 billion fluctuate in an extreme range agribusiness commodity price middle class consumers by – and then, when they revert rises due to natural disasters 2030, compared to 365 million to more usual levels, they and exceptional weather; and in the US and 414 million assume that the problem has movements in metal prices in western Europe. Even gone away,” says Richard as merely the rise and fall today, around 300 million Wilding, professor of supply of the appropriate sector Chinese have adequate chain strategy at Cranfield super-cycle. disposable income to purchase School of Management’s centre discretionary items that were for logistics and supply chain more demanding impossible a little over a management, and the world’s But is such a view realistic? decade ago. first full professor of supply Like it or not, supply-side India, another rapidly chain risk management. issues must be supplemented industrialising nation, is next. “In fact, the evidence is by demand-side issues. And There, the same estimates put that there’s a global resource here the facts make for less the number of middle class deficit emerging.” sanguine reading. consumers at 1.07 billion And it’s a deficit for which According to the latest over the same timeframe. businesses are mostly United Nations estimate, the Latin America, Australasia, unprepared, he says and for planet’s population will not sub-Saharan Africa, indeed6 which few, if any, long-term level off at around nine billion everywhere you look, the plans are in place. by 2050, but carry on growing, middle classes are on the rise, “Talk to companies and surpassing 10 billion people. demanding – and with the what you find is that most of Improved healthcare, fertility disposable income to back those them are using a ‘sticking- declining in Asian and demands – consumer goods in plaster’ approach to the African countries more slowly unprecedented numbers. problem: dealing with the than expected – from AIDS The problem faced by short-term issues raised by a single commodity or category and assuming that things are Talk to companies, and what you find is going to be better tomorrow. that most of them are using a ‘sticking But the evidence is that things won’t be better tomorrow – and plaster’ approach to the problem that this is the new normal.” That isn’t the conventional treatments to contraception, the manufacturers of those wisdom in most boardrooms, and from safer drinking water consumer goods, and the though. There, the view is to improvements in pregnancy manufacturers of the capital that half a century of scares and ante-natal care, the equipment on which those over resource constraints have inevitable consequence of consumer goods are produced, proved to be just that: scares. more births and fewer deaths is the ability to obtain secure A common refrain is that is a larger global population. and stable supplies of the just as the concerns expressed And it’s also an critical raw materials that go in think-tank The Club industrialising and increas- into their manufacture. of Rome’s 1972 Limits To ingly affluent population, Clearly, commodity price Growth proved excessively with a growing appetite volatility on the scale in pessimistic, modern-day for those very commodities question does pose a risk echoes of such concerns where supply and demand are that is difficult to manage procurementleaders
  6. 6. InsIght commodItIes managementQ&A: mATeriAL sciencelMichael Schwartz is chiefmarketing officer of Triple PointTechnology. Here, he talks toProcurement Leaders about thescience that lies behind goodcommodities managementHow big a problem is this issuefor industrial manufacturers?It’s the next big problem thatmanufacturers need to solve. Risingprices – and volatile prices –present huge challenges related tomeeting forecasts and maintainingprofitability. Over the pastseveral years, businesses havefocused intensely on supply the game has changed. Talk to risk as a big issue, but rely onchain efficiency with initiatives some of the larger and more spreadsheets as the corporatesuch as Lean Manufacturing sophisticated manufacturers – technology solution. They useand Just In Time. At this point, companies such as Unilever, huge, multi-tab, error-pronecompanies have wrung most Nutreco, and Grupo Bimbo, the spreadsheets that take weeks toexcess costs out of the supply largest baker in the world – and collect and enter data, and thatchain, so commodity volatility has you’ll hear that they have identified are out-of-date by the timeto be dealt with differently - and commodity management as a management has the information. 7raising prices has limited viability strategic function, and as a key to And lastly, companies lack thebefore it creates demand success. In short, they see analytical tools to turn data intodestruction. commodity management as a insightful information for fast, strategic issue, and not just a accurate decision-making. AllBut how aware of the problem procurement challenge. Those are these issues are solved when ado you think companies are? the early adopters, of course. Most manufacturer adopts Triple Point’sAre they aware of it? Probably. businesses are behind the curve – flagship Commodity XL solution.But, do they misunderstand the some of them considerably so.nature of the problem? Definitely. How does that then translateHuge numbers of businesses think What are the main issues and into bottom‑line benefits?that the extreme volatility of how can Triple Point help? Across a broad spectrum ofcommodity prices is a temporary For manufacturers looking to address commodities, volatility hasblip and will pass. The recent past commodity management, we find averaged upwards of 30%. Thisis not a temporary phenomenon, there are typically three main easily translates to a 15-20%but the new reality, and it’s a case challenges. First is visibility or risk to most manufacturers’of take action now or be left transparency into commodity risk. bottom lines. As I mentionedbehind. Their commodity exposure is buried before, commodity management in subcomponents or ingredients is the next major issue forAre more organisations and further obfuscated across corporate management tofiguring out what to do? After categories, divisions, and tackle. Commodity volatility isall, there’s a point at which geographies. Second, access to not going away and those thatreality has to bite. key information is not available for put the appropriate technologyIt’s happening to some extent, days or weeks when it should be and processes in place first willcertainly. Look at early adopters, real-time. It’s shocking how many secure a large competitiveand you see an appreciation that companies recognise commodity advantage. procurementleaders
  7. 7. through traditional supplier- Gartner Research supply mastering the process through based or category-based chain team, with specific focus investment in the right people techniques. Nor, in many on procurement, sourcing and and tools has become a key instances, is it possible to take supplier management. competitive differentiator for the easy option and fully pass “Short-term commitments heavy users of commodities. on the increase to customers were typically spot buys or “ERP systems don’t really in the form of price rises. agreements with strategic or lend themselves to breaking secondary suppliers that were out underlying commodity Fighting back less than one year in length.” and raw material volumes – Talk to experts, though, and Another strategy tackles the especially in the context of it’s clear that manufacturers problem from the perspective purchased parts,” says Craig have a number of weapons in of material usage. Here, Alan Zawada, senior vice president their armoury. In short, there Braithwaite, chairman of of pricing excellence at are ways to fight back. supply chain consultancy LCP consultants PROS Pricing. Jim Pearce, a partner in the Consulting, and a visiting “Companies are used energy and process industry professor at Cranfield School of to dealing with spikes in practice at consultants A.T. Management, points to the role raw material costs on an Kearney, for instance, talks of played by innovation, product intermittent basis, as they end-product pricing formulae, design and value engineering. happen and now they’re based on raw material input price movements, in order to So is there a better way? Reassuringly, inject greater transparency into supplier-customer negot- some of the world’s leading businesses iations. Similarly, forming strategic alliances with key are pioneering just such a solution suppliers can help.8 Both tactics, he reports, “Once a material becomes having to do it on a weekly or have proved useful in an expensive, ways to use less of even daily basis,” he says. assignment for one of the ‘big it can often be found – through Finally, the process of five’ oil majors in the context substitution, or making items hedging raises governance of steel purchasing, where thinner, lighter or smaller,” he and communication issues, global steel volumes were says. “While there aren’t any says North Rizza. It’s often in the range of two to three easy answers, using 50% less undertaken by finance million tonnes a year. of a material is equivalent to functions – particularly in Indeed, research from a 50% price cut and one that the US, where accounting analyst firm Gartner, probing is permanent.” rules call for hedging the raw material sourcing Hedging is another transactions to be reported – strategies of 31 companies strategy: buying a contract to yet dialogue between finance across five industries, found that lock in a price for a fixed term and procurement is limited all of them had improved their and a fixed volume, a hedge is and often characterised by long-term supplier relationships a strategy for mitigating the suspicion on both sides. in recent times, developing effect of price rises. “The result is that the ‘twin-track’, long-term and While it is by no means procurement function might short-term strategies. a silver bullet – a hedge is, know the usage level and “Long-term commitments by definition, a short-term future demand, but finance is were orchestrated based on solution, and more suitable to hedging in isolation, seeing it pricing formulas, market reducing volatility and price as a financial transaction, not expectations and inflation spikes than stabilising, or as part of a buying strategy,” or deflation adjustments even reducing cost – hedging she says. with the most strategic and is a hugely important tool in a So is there a better way? The preferred suppliers,” reports company’s arsenal. answer, reassuringly, is that Mickey North Rizza, former Neither is hedging without some of the world’s leading research director in the risk which means that businesses are pioneering procurementleaders
  8. 8. InsIght commodItIes managementjust such a solution and in the procurement and scheduling well as when it moves down.” 9process highlighting the art of in order to develop a suite of The trick, explains Norththe possible. solutions that can be leveraged Rizza, is to exploit technology In short, look at some to mitigate the challenge of to identify what to hedge,of these commodity-heavy embedded commodities. combined with technology tobusinesses: Unilever, Reliance “Our Commodity XL suite of identify how and when to bestGroup, Bunge, Rio Tinto, solutions is the only commodity hedge it.Allaint Energy, BKW, Gavilon, procurement, trading, supply “The Triple Point platformSABMiller, Campbell Soup, chain and risk management integrates the workflowsValero and 400 others in more system that works across between procurement andthan 35 countries – and it’s multiple commodities in real finance, providing visibilitypossible to see an intriguingly time,” he notes. into what needs hedging andinnovative technology platform And underpinning the Triple providing the means to hedgein use. Point platform is an innovative it effectively,” she says. blend of risk management and And all within a tightlysuite success financial engineering, adds controlled environment, saysThe platform in question is Kris Timmermans, global head Accenture’s Timmermans.Commodity XL, from Triple of the sourcing and procurement “With the Triple PointPoint Technology. practice at Accenture. platform, people in your buying Simply put, explains “Anyone can do hedging: organisation are effectivelyTriple Point Technology’s it’s a fixed price, for a fixed [given the capabilities of]chief marketing officer period, at a fixed premium,” he traders – but are operatingMichael Schwartz, in its explains. “Triple Point’s hedge within very constrained20-year existence, the firm optimisation is different, volume and risk policies,” hehas parleyed expertise in combining hedging with deri- explains. “They’re tradingcommodities, accounting, vatives, giving protection when within very tight value at riskcompliance, risk management, the market price moves up, as controls and with full procurementleaders
  9. 9. InsIght commodItIes management finance function oversight.” What’s more, he says, the transformative power of the approach can extend through the supply chain, with manufacturers carrying out hedge optimisation on behalf of suppliers, securing not just top-level raw material prices, but prices for tier-1 and tier- 2 suppliers. Manufacturing and engineering company Caterpillar, he points out, operates in just this way in respect of steel. Wake-up call The problem of embedded Make no mistake, those manufacturers commodities is one that many who don’t manage the problem will see businesses are starting to wake up to, but one for which the results on their bottom line very few have formulated a strategy. controls, are fewer in number. challenge is one that is Yet, it’s already possible Triple Point Technology, relative, not absolute. to see that finely balanced a name with which few “The issue with raw levels of supply and demand industrial manufacturers material price volatility10 look set to deliver significant with embedded commodity is dealing with it better price volatility in the years challenges will presently than your competitors, ahead – especially so as the be familiar, looks set to not eliminating its effects consumer classes in newly achieve greater prominence completely. And if you’re out- industrialising economies because, like many of the doing the competition, you’re enter the global marketplace. most complex challenges, ahead of the game.” Are there solutions that it’s a combination of people, Make no mistake, those can at least mitigate against processes and technology manufacturers who don’t the difficulties that this will that will help to differentiate manage the problem will see cause? Yes, at least in part. the winners from the losers. the results on their bottom But sophisticated, holistic As Roy Williams, managing line. And it’s a problem that solutions, backed by director of sourcing platform will get worse if ignored. technology and governance Vendigital observes, the Malcolm Wheatley ABoUT oUr sPonsor Triple Point is a provider of cloud and raw materials in industries contact and on-premise commodity including energy, metals, Triple Point Technology management software that minerals, agriculture, transport, 301 Riverside Avenue delivers advanced analytics to shipping, consumer goods, Westport, CT USA 06880 optimise end-to-end commodity industrial manufacturers, and big Tel: +1.203.291.7979 and energy value chains. box retailers. Triple Point was Email: info@tpt.com Triple Point’s Commodity named a “Leader” in Gartner’s Management platform enables ETRM Magic Quadrant for its over 400 customers in more completeness of vision and ability than 35 countries to profitably to execute in 2009, 2010, Procurement Leaders in no way endorses the manage exposure to energy 2011 and 2012. products or services provided by our sponsor procurementleaders
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