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Commodity Technology Advisory LLC

Houston TX and Prague CZ
www.comtechadvisory.com
Consumer Product Companies
Smart Commodity Management
White Paper
Commodity Management A ComTech Advisory Whitepaper

Commodity Technology Advisory LLC, 2014 2
Table of Contents
Introduction .................................................................................................................................................. 3
The Growing Need for Commodity Management in Manufacturing Industries .......................................... 3
The Future of Commodity Management ...................................................................................................... 4
EKAs Smart Commodity Management Solution .......................................................................................... 5
Summary ....................................................................................................................................................... 6



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Introduction
Rapid global population growth combined with increasing urbanization is driving demand for raw materials of all kinds. By
2030, it is estimated that there will be 1.4 billion middle class consumers in China compared to 365 million in the US and 414
million in Europe
1
, placing increasing strains on the supply and distribution of raw materials and finished products. For the
last five or more years, commodity and raw material prices have been extremely volatile, in part due to supply/demand
tightness, and this paradigm is one that is set to continue in to the future. For consumer product companies, these facts
represent a significant challenge and risk to their businesses.
Consumer product companies, faced with volatile raw material and
energy costs on one side, and price conscious customers willing to shop
around on the other, have sought ways to minimize these risks. They
have stripped costs and inefficiencies from their supply chains and
businesses and, in some instances, radically overhauled the way in which
they manage the procurement and planning functions in favor of a
commodity management approach. Commodity management means
approaching price exposure more like a trader tracking price movements,
utilizing hedging and other risk mitigation tools and measuring
performance against market as opposed to budget or forecast. Some
companies have deployed commodity management software, fully
integrated with their ERP and other systems, to manage supply chain
price exposure.
In an uncertain but volatile future, more consumer product companies will need to adopt commodity management to ensure
their profitability and even survival. In order to be truly competitive however, they will need to utilize more agile commodity
management solutions that provide predictive analytics and decision support. This paper examines commodity management
as a concept and looks at the emergence of next generation, commodity management v2.0 solutions.
The Growing Need for Commodity Management
Over the last decade, as the Earths population surpassed 7 billion people and Asian economies like those of China and India,
grew at average rates greater than 10% per annum, demand for raw materials of all types has grown considerably. The
supply/demand tightness created by this increased demand and/or, bottlenecks in production and distribution, has created
an environment in which raw material prices are extremely volatile and mostly rising over time. Even though prices have
been falling during much of 2013, volatilities remain high. Nor is this a temporary phenomenon as there is now 7-8 years of
history of price volatility and with further population growth and increasing urbanization in many developing regions of the
world, supply and demand tightness will undoubtedly continue.
Highly volatile commodity and raw material prices have a huge impact across a wide range of consumer product
manufacturers ranging from bakers to highly sophisticated computer manufacturers; in terms of raw material, packaging and
energy prices. Many of these companies also find that retail markets for their finished products are very competitive and
price conscious. Consumers are simply unwilling to pay continuously increasing retail prices. Effectively, consumer product
companies are squeezed between highly volatile and mostly more expensive raw material and energy costs on the one hand
and more cost conscious consumers on the other.
In a recent survey
2
, when asked what key factors currently affected business results, 91% of the participating companies, all
consumer product companies of various types, stated Raw material prices. The same survey showed that the most popular
tools used to protect against the negative results of raw material price volatility were long-term price agreements with
suppliers, passing on costs to customers, optimizing inventories and product substitution. Most suppliers are smaller and less

1
UN Population Division/Goldman Sachs
2
Raw material cost management- business critical supply risk and price volatility, INVERTO raw materials survey 2011
By 2030, it is estimated that
there will be 1.4 billion middle
class consumers in China
compared to 365 million in the
US and 414 million in Europe,
placing increasing strains on the
supply and distribution of raw
materials and finished products.
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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.
A commodity management solution needs to be able to handle multiple
commodities and raw materials. It needs to be able to integrate with ERP
and other systems to pull in production, procurement and other data and it
needs to be able to allow traders to make decisions and capture spot
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
provide hedge effectiveness functionality and all of the required regulatory
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 its infancy with respect to the solutions available and what these systems can deliver. Todays 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.
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.
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Finally, in order to eliminate integration issues, provide improved data quality and timeliness of information, they
will need to be multi-commodity and encompass the entire supply chain from origination to point of sale capturing
all the data necessary in a single platform.
In short, commodity management v. 2.0 will need to incorporate procurement/trading, supply chain and risk
management functionality and data providing a user-controlled and highly usable predictive analysis environment.
Commodity management solutions need to move from after the fact transaction management to fact-based
decision, predictive and prescriptive support systems in order to provide the types of business benefits needed in
the consumer products arena of today and the future.
EKAs Smart Commodity Management Solution
EKA has a strong track record of delivering CTRM solutions in the agricultural and Softs space specifically and is increasingly
active in both the metals and energy commodity markets. Its solution set is based on modern architectures and technologies,
is highly modular and web-enabled. It believes its commodity management solution is strongly differentiated over its
competitors in providing decision support, predictive analytics and optimization
tools and its development focus will continue to be the optimization and
decision support aspects of its solution. Eka is redefining commodity
management as not just an after the fact monitoring and reporting solution,
but one that helps users make better and more informed business decisions.
Eka is defining smart commodity management or v2.0. of this software
category.
EKA has rightly taken the view that there is a universe of requirements for the
various types and scales of consumer product businesses ranging from a rather
simple need to hedge fixed price risk via derivatives, all the way through to
supporting extremely complex multi-commodity supply chain optimization,
management and hedging at global businesses. It has configured a series of commodity management solutions that offer an
affordable and pragmatic solution in each instance by making use of its modular solution set and configuring specific
solutions by bringing together the right modules in preconfigured arrangements. For customers that simply hedge out fixed
price risk, Eka has configured a solution that includes functionality such as:
The ability to import exposures from the ERP system,
Identify hedges,
Enter and manage the commodity derivatives,
Handle FX exposure,
Perform hedge accounting, and the regulatory reporting aspects of this activity,
As well as monitor and manage market risks.
The solution may be provided via the internet.
At the other end of the scale, Eka has included additional modules to fully support:
Procurement planning activities,
Coverage and variance analysis
Decision support tools such as simulation, Predictive analytics and,
Optimization.
The result of this is a fully featured and comprehensive Smart Commodity Management v2.0 solution.
EKAs approach promises the potential of significant business benefits in competitive markets and a reduced total cost of
ownership. It also offers scalability and agility so that if the business evolves and becomes more complex, additional modules
may easily be added.
Eka is redefining commodity
management as not just an
after the fact monitoring and
reporting solution, but one
that helps users make better
and more informed business
decisions.
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While these solutions are in the process of being taken to market, Eka does appear to be keen to innovate specific industry
solutions based on the use of its modular architecture and selective use of functional modules to provide end users with
tailored solutions on a common platform at a competitive cost.
However, EKAs true differentiator is the promise of helping customers make better, fact-based business decisions such as,
for example,
What should we hedge and how much?
How effective and profitable are our hedging operations?
What is the impact of the net price of our purchases including the impact of hedges?
What is the best way to optimize our production and procurement plans?
Utilizing predictive analytics, users can make better business decisions by providing more insights through views on what the
future could look like and then by helping users to make decisions. For example, 6-months into a 12-month budget cycle, the
solution can help users understand where they are saving, how much they are saving and what they can do to optimize the
plan still further. This type of decision support and analytics is provided through user-defined graphical and intuitive
dashboards that provide access to current information and allow drill-down into all aspects of the information.
Summary
As consumer product companies experience continued and even greater raw material price volatility, they will be forced to
adopt a more market-based approach to commodity management. They will seek solutions that have a light footprint, that
are agile, flexible and can deliver significant business benefit by guiding and aiding users through the significant complexities
of the supply chain and commodity management to make better and more informed decisions. Today, a small number of
CTRM software vendors have commodity management solutions that help monitor and report in an after the fact manner
and that are based on older technologies and development approaches that make them expensive and inflexible.
Commodity management solutions that are based on new web-enabled and service oriented architectures offer a lower cost
of ownership and are significantly more flexible. Those that can move the commodity management software category further
by innovation in predictive analytics, optimization and decision support, are better positioned to assist consumer product
companies of all sizes and foci. EKA has an offering that holds much promise in this regard and is pushing to define the future
of smart commodity management or commodity management v.2.0.



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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, whos 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 http://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 CTRMCenter at
http://www.ctrmcenter.com.
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