Five Steps to Procurement Risk Excellence
June 21, 2018
Commodity markets are constantly evolving. Extreme weather conditions disrupt food harvests and slow trade routes while new tariffs shift alliances and drive price volatility. New sources of energy provide flexible fuel options while changing consumer preferences require constant innovation in ingredients and sourcing. The list is endless.
In this era of rapidly changing markets, manufacturers face more commodity risk than ever before. Increased pricing complexity and volatility for both direct and indirect exposure drive risk and uncertainty. Shifting markets – including increased global demand, acquisitions, and expanding networks of global suppliers and plants – drive more FX exposure, complicated hedging strategies, and more stringent regulatory and risk policies.
How companies manage risk today
Companies have been managing risk with combination of spreadsheets and teams manually creating reports and graphs before monthly executive risk meetings. When market signals change, teams rush to create more spreadsheets – generating more reports and static charts to manage existing spreadsheets and more reconciliation spreadsheets to manage spreadsheet errors.
It’s a loop that causes delayed responses to shifting market conditions and valuable time lost that could have been spent managing decisions to improve margins. It’s inefficient, expensive, and does not provide instant insight to enable informed decisions.
What does procurement excellence look like?
Procurement excellence is in the eye of the beholder. For category managers and buyers, you need more visibility into cost components to negotiate better deals with suppliers. You must track markets based on pricing and deliveries so you can make informed decisions when choosing spot vs. carry vs. alternate suppliers. And, as always, you want to evaluate your performance against your budget, internal benchmarks and markets
For risk managers, the criteria differ. You need to analyze all relevant data to determine when and how much to hedge, evaluate all possible hedging strategies, and track risk by portfolio, asset, department, and region. Detailed reports, including performance by broker and instant mark-to-market and VaR analyses, are essential. You must receive instant alerts when compliance policies are breached to quickly and effectively resolve issues.
Finance managers need instant reports on spend across commodities and business units so you can analyze where variances are, evaluate spend attribution and the factors causing the most and least impact and create accurate, timely hedge accounting and regulatory reports. You need flexible reporting to generate the right analyses based on current business needs.
How can you achieve procurement risk excellence?
To achieve procurement risk excellence, you must invest in technology. Traditional solutions like spreadsheets or BI tools jury-rigged to accommodate commodity risk management are not fast enough, flexible enough, or functional enough to provide the information you need to make the best possible decisions.
To gain excellence, you must:
- Automate – connect your physicals contracts and inventory, hedges from brokers, and market data together to reduce operational and repetitive tasks and spend more time on strategic analysis
- Collaborate – create a single version of truth for all stakeholders making standard reports and insights available to everyone instantly
- Substantiate – make more data-driven decisions by gaining insights on real-time exposure to market, analyzing market signals and evaluating possible impacts on your portfolio
- Simulate – analyze what would happen if prices moved, raw material volumes changed, you bought on spot, refining charges changed, or a supplier defaulted
- Eliminate – replace spreadsheets and manual processes and be better prepared with more accurate and timely reports
Change is hard, and companies have been managing risk in spreadsheets for a long time. But, like the days of flip phones and dial-up modems, new technology is readily available to help improve efficiency, cut costs, and decrease risk. You just have to reach out and grab it.