WHITE PAPER

COMMODITY MANAGEMENT
AND ERP
Introduction
Over the last several years, the phenomenal growth and
expansion of wholesale commodity trading has begun to
have a significant impact on both business practices and
strategic thinking across commodity supply chains.
Producers and processors of raw materials (commodities) and sellers
of finished goods that rely heavily on commodity feed stocks have had
to come to terms with a business environment of generally increasing
and significantly more volatile prices for their raw materials. Despite
some weakening in commodity prices on the back of a stronger dollar
and increased supply recently, volatilities remain problematic and in
the longer-term, prices will continue to increase as the global popula-
tion continues to grow and as more of that population become
consumers of goods.

Recently, many of the larger banks have begun to exit com-

modities trading under fire from various regulators and a
set of new regulations. Their position has arguably been taken up
by large commodity trading firms, with companies such as Glencore,
Mercuria, and others expanding their operations and filling much of the
liquidity vacuum left by the exit of the banks. These large commodity
traders have also experienced much thinner trading margins and have
increasingly sought to secure physical commodity supply by purchas-
ing producers and their assets in order to de-risk a portion of their
supply chain. In the future, the boundary between producer and
trader may be increasingly blurred.

© Commodity Technology Advisory LLC, 2014

 Commodity Management and ERP A ComTech Advisory Whitepaper

As a consequence of these trends, many commodity pro-

ducers, processors, merchants and even sellers of finished
goods have been forced to re-examine their supply chains,
looking for both cost reduction and potential optimizations
in inventory planning, warehousing, and logistics helping to
reduce their feedstock costs. However, these process improve-
ments do little to reduce the exposure to commodity price volatility.
As a result, many companies have also started to hedge that price
exposure using a variety of readily available financial instruments for
commodities. However, with increased hedging via financial trading,
these firms now find themselves exposed to increased regulatory risk
as new and bolstered regulations such as Dodd-Frank, EMIR and
MiFiD2 demand more active and increased regulatory vigilance and
reporting. In summary, current trends in commodities markets means
that many firms have seen the complexity of their businesses increase
dramatically.

Traditionally, commodity risk management has been a highly

specialized function, used primarily by wholesale and retail
commodity trading firms; with the requisite technology solu-
tions provided by specialist commodity trading and risk man-
agement (CTRM) applications. A CTRM system provides the ability
to quickly and easily capture deals or trades in the various physical and
financial instruments that are used as hedges. They also allow close to
real-time valuation and position reporting with easy to use analytical,
reporting and drill-down capabilities. This sort of functionality and
capability has not been previously considered to be a part of an ERP
solution.

© Commodity Technology Advisory LLC, 2014

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 pro-
cesses. 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 pric-
ing is dependent upon a number of quality criteria.
Furthermore, the ERP solution is able to manage a
wide variety of other common problems facing phys-
ical commodity producers and processors, includ-
ing sophisticated document management around
shipping and logistics, tracking inventory in multi-
ple 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, howev-
er, changed the nature of the game for virtually all large-scale process-
ing 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.
Margins 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 fi-
nalized until some point in the future. Furthermore,
the system must be able to process all of the different types of financial
instruments in terms of execution, settlement, accounting and regulato-
ry compliance needs.
Active risk management further requires the ability to analyze
positions in real-time via drill-down capabilities into that physical and/or

© Commodity Technology Advisory LLC, 2014

 Commodity Management and ERP
financial position data in order to identify and explain
changes or trends in valuation or position. This capa-
bility requires an intuitive user interface that overlays
an application capable of accessing and processing
complex data structures in real-time. Furthermore,
the position and mark-to-market data needs to be
available at multiple levels across multiple commod-
ities. As exchanged-based trading in commodities
is now global, price movements occur 24-hours per
day, potentially requiring all of this information to be
accessible via a hand held device like a tablet or mo-
bile phone. Unfortunately, this level of performance
and usability is an area in which many existing solu-
tions fall sadly short.
Enterprise risk management, of course, is
not just concerned with price risk but also risks as-
sociated with foreign exchange, counterparty credit
and treasury management as well as various other
operational exposures in the legal, compliance,
contract management, logistics and other areas of
the business. Being able to gain visibility into (and
appropriately manage) all of these additional risks
demands the use of a fully integrated solution in
which the appropriate data is accessible and can be
analyzed in multiple different dimensions as dictat-
ed by the nature of the business. Such a capability
requires that the risk management aspects of com-
modity management be tightly integrated with all
the other functions of an ERP solution.
© Commodity Technology Advisory LLC, 2014
A ComTech Advisory Whitepaper
Finally, commodity management solutions also need to help
their users identify opportunities to improve profitability and continually
optimize their businesses according to market dynamics. Opportunities
to perform physical swaps, make sales of intermediate products, opti-
mize recipes, eliminate poorly performing suppliers and logistics con-
tractors, for example, may all help profitability but require an integrated
real-time view of the business.
Providing a commodity management solution for physical com-
modity producers, processors and consumers demands a very high-lev-
el of integration (both across business functions but as importantly,
across a variety of different commodities), a scalable and powerful plat-
form capable of handling large quantities of data often extracted from
external systems and yet providing near real-time information about the
business. Such a solution must have, at its core, a powerful and flexi-
ble pricing engine that is capable of modeling and calculating purchase
and/or sales prices based on a wide variety of factors including market
data, differential rules, provisional and final pricing, fees, taxes and oth-
er forms of charges (customs, broker fees etc.). It also must to be able
to capture the range of financial commodity trades and instruments
used in hedging, calculate position in a multitude of views for different
purposes, provide analytical tools for drill-down and “what if” analysis,
and ensure compliance with all regulations. Finally, it needs to do this
while still providing all the complex functionality and business benefits
associated with an ERP solution, including inventory management, lo-
gistics, production planning, sales, manufacturing and of course finance
and accounting often tracking and reporting on financials according to
a number of complex accounting standards. It is a tall order.
Commodity Management and ERP A ComTech Advisory Whitepaper

SAP COMMODITY MANAGEMENT

SOLUTION
The leading provider of ERP software globally is SAP. With thousands of implementations across almost every in-
dustry, SAP has conceivably seen almost every business need imaginable in terms of ERP requirements.

At the request of its customers, SAP has created Figure 1 | SAP Business building blocks for Commodity Management
ANALYTICS
a strategic investment area within SAP Business ANALYTICS
Suite applications complete with a dedicated de-
QUALITY mgt.
velopment and solutions team to collaborate with
COMMODITY COMMODITY
customers on commodity management. The SAP PURCHASE
WAREHOUSING
SALES
Commodity Management solution is able to lever- PROCESS PROCESS
TRANSPORTATION
age SAP’s core strengths in logistics, finance and
industry solutions as well as any and all work on plat- MANUFACTURING
form, analytics and performance. SAP Commodity
Management is already licensed by more than 70 COMMODITY RISK MANAGEMENT
SAP customers around the world.
ACCOUNTING

The result is a solution that has addressed traditionally found in commodity transactions. Added to that function-
the three key areas needed in a commodi- ality is the ability to track the status of a price; as the final price cannot
ty management solution as follows, often be determined until some point in the future either due to fixation
timing issues or a need to validate quality attributes, for example.
COMMODITY PRICING – SAP’s pricing
Figure 2 | Aspects of Commodity Pricing
capabilities within a commodities or raw materials
context were already very robust and configurable
but SAP has added a special price calculation for
commodities that are traded at exchanges. Com-
1
modity pricing with SAP offers tremendous flexibil- QUALITY QUANTITY MARKET DATA RULES
ity in terms of building formulas and rules, building FRAMEWORK
in other pricing criteria such as quality attributes for
example, utilizing quoted market prices, calendars,
currency exchange rates and much more. It is at the
heart of the SAP Commodity Management solution
and it supports the assessment of fees, taxes, dif- Flexible Price Calculation
ferential pricing, fixed and floating pricing, derived
forward curves and many of the other complexities

© Commodity Technology Advisory LLC, 2014

 Commodity Management and ERP A ComTech Advisory Whitepaper

The strength of SAP commodity pricing is that it is SAP has also worked diligently on the user experience for analytics
fully integrated with the SAP standard ERP pricing and reporting particularly leveraging the SAP Fiori user experience
and therefore benefits from the increased flexibility (UX) and working in design thinking co-innovation with customers to
and configurability that this brings. It also supports produce highly consumable and personalized dashboards and reports
index-based and non-indexed based calculations as that can be accessed across a broad range of devices and provide drill-
well as industry-specific pricing needs across all ar- down capabilities. SAP Commodity Management can offer users supe-
eas of raw materials and commodities. rior performance and flexibility as well as innovative reporting and user
interfaces for enhanced productivity.
COMMODITY RISK MANAGEMENT
– SAP Commodity Risk Management supports a
complete range of derivative transactions including Figure 3 | SAP Commodity Management Analytics User Interface Example
futures, listed options, forwards, swaps and OTC
options which are used in real-time reporting and
analytics. It offers real-time position reporting for
physical commodity documents and derivative trans-
actions and helps users with mark-to-market calcu-
lations and reporting. It also supports the capture
and execution of a number of commodity derivatives
with full integration with SAP ERP allowing direct
processing of postings and payments within one
system.
The SAP Commodity Risk Management
offering is both highly configurable and adaptable
in supporting multiple commodities, and other key
attributes. Gaining visibility into key risk metrics is
easy to achieve across a variety of views into the data
by different selection criteria. As a result of the work
SAP has done into the user interface, the results are
available in readily consumable formats and dash-
boards.

PERFORMANCE AND ANALYTICS

SAP offers its Commodity Management solution
on the SAP HANA in-memory platform to provide
for scintillating performance and allowing real-time
calculation of complex reports such as position and
mark-to-market, for example. It can offer the com-
plete solution in the Cloud via the SAP HANA En-
terprise Cloud to enable rapid implementation and
a compelling Total Cost of Ownership. Furthermore,
users can select just the functionality that they re-
quire.
© Commodity Technology Advisory LLC, 2014
Commodity Management and ERP
SUMMARY
SAP Commodity Management is a specific exten-
sion of the SAP ERP solution thus incorporating
decades of experience in building, delivering and
supporting fully integrated solutions across all indus-
tries including those that deal with commodities and
raw materials. As a result of this pedigree, it offers
some significant benefits to its users in terms of be-
ing able to leverage the vast resources that SAP has
to offer in terms of performance, scalability, User In-
terface, functionality and much more.
The focus of the solution supported by a
strategic investment and an experienced SAP com-
modities management team is on producers, pro-
cessors and merchants of raw materials and sellers
of finished goods. It is a true Commodity Manage-
ment solution that delivers users an enhanced abil-
© Commodity Technology Advisory LLC, 2014
A ComTech Advisory Whitepaper
ity to manage their business by optimizing their purchasing and sales
activities, helping them understand their exposures, manage positions
and conduct hedging operations. Its’ focus is on de-risking the supply
chain and helping customers face the unique challenges inherent in
industries that are reliant on raw materials.
Launching the SAP Commodity Management solution in 2011, SAP
has been successful at building in commodity pricing, commodity risk
management and other crucial aspects of functionality for this growing
group of customers. It already boasts more than 70 customers for its
commodity management solution across multiple industries, such as
mining & metals, agribusiness and consumer products and others.
When you add the ability to leverage performance-enhancing
technology such as SAP HANA, sophisticated analytics and the work
done by SAP into making highly usable user interfaces, it is clear that
SAP has well and truly arrived in the commodity management arena
and has built a platform that can only gain in strength with time.
ABOUT
Commodity
Technology
Advisory
LLC
Commodity Technology Advisory is the leading analyst organization covering the
ETRM and CTRM markets. We provide the invaluable insights into the issues and
trends affecting the users and providers of the technologies that are crucial for
success in the constantly evolving global commodities markets.

Patrick Reames and Gary Vasey head our team, who’s combined 60-plus years in the
energy and commodities markets, provides depth of understanding of the market and
its issues that is unmatched and unrivaled by any analyst group.

For more information, please visit:

www.comtechadvisory.com
ComTech Advisory also hosts the CTRMCenter, your online portal with news and
views about commodity markets and technology as well as a comprehensive online
directory of software and services providers.
Please visit the CTRMCente at:
www.ctrmcenter.com

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