Commodity Management for Automotive Manufacturers and Suppliers

Transcription

1 Triple Point Solution Brief Commodity Management for Automotive Manufacturers and Suppliers COMMODITY XL Manage volatilty. Reduce risk. Preserve margins. Ensure compliance. TRIPLE POINT TECHNOLOGY, INC. TPT.COM

2 Overview For over seventeen years, Triple Point Technology has deployed systems to the world s most successful global commodity houses and energy companies, enabling them to proactively manage the physical and financial buying, selling, logistics, accounting and risk management of multiple commodities on an integrated platform. More recently, faced with fundamental changes in the metals, chemicals, plastics and energy market environment, a new set of global organizations Automotive Manufacturers and Suppliers are recognizing how these same systems can help manage raw material risk and preserve profit margins in the face of today s unprecedented commodity volatility. The new-normal Volatility, Volatility, Volatility These lean, global supply chains are now faced with unprecedented commodity volatility and old strategies such as building inventory when prices are low for use when prices rise are dated and not realistic. Profit margins and the executives charged with preserving them are coming under fire like never before. In the past, commodity price increases were typically associated with supply-side crises and were relatively localized and temporary. Power shortages in China lead to cuts in aluminum production. Pipeline disruptions in the Middle East or Nigeria lead to short-term oil supply outages. But today, in addition to supply-side disruptions caused by geopolitical events, commodity price increases and volatility are linked to several longer term demand-side trends such as the rapid growth of non-oecd countries that have a seemingly insatiable requirement for all raw materials. Analysts generally agree this demand-side growth is here to stay for the foreseeable future. With a tight supply/demand equation, the slightest alteration in either demand or supply brings wild swings in commodity prices welcome to the new-normal. Supply chain risks Rising energy costs 45% Rising transportation costs 42% Commodity price and volatility 38% Business Problem: Unprecedented Margin Pressures Due to Rising Commodity Prices & Volatility The focus for supply chain groups over the last 15+ years has been on efficiency and speed. Manufacturing and supply chain techniques such as Just in Time (JIT) inventory management, Total Quality Management (TQM), Six Sigma and Demand Driven Supply Network (DDSN) were introduced to eliminate waste, reduce inventory and improve quality. These efforts have led to a striking reduction in buffer inventories to bare minimum levels. In addition, these leaner supply chains have become more global as organizations look for lower cost suppliers and new markets to sell product. On one hand, this has reduced costs and opened new markets but on the other hand it has significantly limited the ability of businesses to handle unforeseen shocks to the system such as sharp raw material volatility. Intellectual property infringement Supplier product quality failures Lower consumer spending Supply failure Rising labor costs Regulatory compliance Internal product quality failures Supply chain security breaches IT risks Immature physical infrastructure in offshore countries Shortage in managerial talent Natural disasters 11% 15% 19% 18% 22% Source: AMR Research, % 26% 26% 37% 36% 34% 33% 50% AUTOMOTIVE SOLUTION BRIEF TRIPLE POINT TECHNOLOGY, INC. 2

3 Automotive companies end products often contain tens or hundreds of base commodities in various and often unknown quantities. As such, these businesses have a highly complicated procurement portfolio, with varying levels of commodities in the make up of a variety of products. Having the information and tools to expose the risks and the talent to manage the complex web of risks offers a distinctive competitive advantage. Taking Control in the New Era of Price Volatility, Accenture. Volatility obviously brings risk especially for organizations not used to running day-to-day operations in the midst of such rapid fluctuations in prices. But volatility also brings opportunity; there is a reason traders desire volatility it provides the opportunity to outperform other traders and to make money. The manufacturers that embrace the new-normal and put the processes and systems in place to better manage volatility and risk will out perform competitors. The effectiveness of risk management will be a huge differentiator going forward. Increasing commodity price volatility Steel Mill Products Metals and Metal Products Pulp, paper, and Allied Products Chemicals and Allied products Crude Petroleum (Domestic Production) Industrial Electric Power and adopt new risk management processes, tools and measurements required to optimize raw material acquisition all while ensuring compliance with the regulatory demands and hedge accounting requirements of SOX, FAS 133 (FAS 161), FAS 157, IAS 39, IFRS 7 and others. Many industrial manufacturing organizations still acquire commodities in much the same way they procure noncommodity supplies. The same processes used to purchase office supplies are employed to procure metals, plastics and other commodity/energy inputs to the manufacturing process. Without the processes, tools and measurements employed by today s leading commodities traders and risk managers, the typical procurement function is not equipped with the real-time transparency, business intelligence, analysis tools, market data and position reporting required to make the most profitable, cost-efficient decisions around commodity coverage and procurement, such as: Source: US Bureau of Labor Statistics, Price Producer Index of selected commodities January 1970 through February 2009; Accenture analysis Should I source commodities at a fixed price at time of purchase? Do I lock in 100% coverage or buy some percent of commodities in the spot market? Should I buy more than is required for the current cycle and store the surplus? A new era of solutions that use risk management techniques adopted from the energy and commodity trading industries and applied to the automotive industry are the next breakthrough in supply chain management. Solution: Profitably Manage Commodity Procurement To preserve margins, Industrial Manufacturers must move quickly to approach commodity procurement differently and more proactively than ever before. While not traditionally viewed as commodity trading organizations, automotive companies can now learn from leading commodity houses What percent of coverage should be from long-term contracts? What is the commodity price risk in each case? The market risk? The counterparty credit risk? Can I factor freight rate risk into my commodity decisions? When and how should I use financial derivatives such as futures, options and swaps to hedge against volatility and inflation around future commodity purchases? Do I qualify for hedge accounting status and what are the requirements? Do I have the tools for FAS 157 compliance? AUTOMOTIVE SOLUTION BRIEF TRIPLE POINT TECHNOLOGY, INC. 3

4 Ford Motor Company CFO, Lewis Booth, told reporters we ll be doing our best to wash out commodity price increases with those structural cost savings Ford has put in place. Automotive News, 2010 COMMOdity Xl the AutOMOtive industry SOlutiOn Suite Procurement Commodity XL is the leading commodity and enterprise risk management solution for procurement and other functions to balance between profitable purchasing, coverage requirements, supply chain movements, risk management policies and accounting regulations in today s volatile and complex environment. Currently, the typical procurement function within an automotive organization does not have real-time access to information or the solutions to answer these questions and manage the associated risk. But by taking the lead from their commodity/energy peers, they can follow a timetested, market-proven path to more profitably manage the commodity acquisition process regardless of the volatile market environment around them. integrated demand Planning Commodity XL Strategic Planning and Procurement (SPP) manages, measures, analyzes and reports supply coverage against the demand plan at both roll-up and granular levels. Price risk Management Commodity XL provides the price risk management tools that are critical for the effective and efficient sourcing and hedging of commodities in volatile markets. Supplier risk Management Commodity XL for Supplier Management proactively measures, manages and mitigates the risk arising from supplier default and addresses the entire supplier risk process with a full range of analysis tools. hedge Accounting Commodity XL for Hedge Accounting manages the daunting set of requirements under hedge accounting regulations including detailed testing, documentation and reporting that must be performed in order to qualify for hedge accounting status and it ensures full compliance with fas 133 (including fas 161 disclosures), IAS 39 and similar national hedge accounting regulations. fair value disclosure Commodity XL for fair Value Disclosure provides the tools and framework to define, measure and manage fair value levels and meet all disclosure requirements for fas 157 and IfRS 7 compliance. COMMOdity Xl the AutOMOtive industry SOlutiOn Procurement Commodity XL is the leading commodity and enterprise risk management solution that balances between profitable purchasing, coverage requirements, supply chain movements, risk management policies and accounting regulations in today s volatile and complex environment. With Commodity XL in place as the commodity management platform, the procurement function not only has the tools to ensure coverage and deliver the material when manufacturing needs AuTOMOTIVE SOLuTION BRIEf TRIPLE POINT TECHNOLOGY, INC. 4

5 it, but also now has the analysis and risk management functionality to determine the most profitable scenarios over when to buy, whether to store and whether to hedge using financial derivatives such as futures, options and swaps. The measure of success would now include the mark-to-market P&L, as well as the ability to deliver on time. Commodity XL lets Automotive leaders actively manage the buying, coverage, position reporting, hedging, risk management and regulatory compliance for commodity procurement. integrated demand Planning Commodity XL Strategic Planning and Procurement (SPP) manages, measures, analyzes and reports supply coverage against the demand plan at both roll-up and granular levels. The SPP solution includes analysis for all physical assets such as commodities, plants, storage facilities and warehouses to name a few, and has the flexibility to manage different calendar and budget periods. Time-period definition is flexible to support an organization s requirements for longer dated periods like annual to monthly, weekly and daily granularity. As plans change to reflect market conditions, SPP provides the capability to look back and understand changes and drivers from version to version. Management delivers the information to make risk adjusted decisions, utilize best practice methods for reducing supplier risk exposure and improve internal and external transparency. In the volatile commodity and energy markets, proactive supplier risk and exposure management are powerful weapons to help companies anticipate excessive exposure and supplier instability, rather than react to them. Triple Point s Commodity XL for Supplier Management proactively measures, manages and mitigates the risk arising from supplier default and addresses the entire supplier risk process with a full range of analysis tools. Price risk Management Commodity XL provides the price risk management tools that are critical for the effective and efficient sourcing and hedging of commodities in volatile markets. Commodity XL has the functionality and processes to ensure leadership-issued limits and controls are disseminated and enforced. Commodity XL delivers both the tools to measure risk such as VaR (value-at-risk) and the means to perform analysis of P&L changes caused by market movements under normal and alternative scenarios. Commodity XL helps companies gain business intelligence for better decision making and proper oversight, in addition to precisely managing and mitigating risk, and measuring and evaluating performance. With Commodity XL, Industrial Manufacturers can employ the most effective forward purchasing, trading and hedging practices that keep procurement costs down and preserve margins. Supplier risk Management Commodity XL for Supplier Management provides a realtime, integrated process for efficient and accurate supplier analysis and decisions. Latency is removed from the work flow so conclusions are neither delayed nor based on incomplete data. Additionally, Commodity XL for Supplier SPP enables you to capture amounts or per-unit prices with forecasted quantities hedge Accounting Commodity XL for Hedge Accounting supports a comprehensive risk management program that enables firms to balance optimal economic benefit, risk management and stable financial statements. FAS 133 (FAS 161), and IAS 39 help alleviate the problem of derivatives used for hedging purposes causing large fluctuations in earnings. Hedge accounting recognizes the offsetting effects between the derivative and underlying commodity, allowing an organization to recognize the net profit or loss at the same time. This ensures that when the underlying commodity impacts earnings, so does the derivative. Commodity XL for Hedge Accounting manages the daunting set of requirements under hedge accounting regulations including detailed testing, documentation and reporting that must be performed in order to qualify for hedge accounting status. It ensures full compliance with FAS 133 (FAS 161), IAS 39 and similar national hedge accounting regulations. AuTOMOTIVE SOLuTION BRIEf TRIPLE POINT TECHNOLOGY, INC. 5

6 Without the processes, tools and measurements employed by today s leading commodities traders and risk managers, the typical procurement function is not equipped with the real-time transparency, business intelligence, analysis tools, market data and position reporting required to make the most profitable, cost-efficient decisions around commodity coverage and procurement. Fair Value Disclosure Commodity XL for Fair Value Disclosure is a comprehensive module for FAS 157 and IFRS 7 compliance. It provides the tools and framework to define, measure and manage fair value levels and meet all disclosure requirements. Commodity XL for Fair Value Disclosure ensures the proper checks and balances, consistency of methods and auditability in the assignment of levels and the disclosure of markto-model assumptions and valuations. FAS 157 and IFRS 7 force organizations to derive market prices for multiple types of assets and liabilities. The regulation requires companies to measure and disclose the mark-to-model techniques and worth of hard-to-value instruments. Commodity XL for Fair Value Disclosure provides the consistency and comparability of fair value measurements for stakeholders to confidently do business with your organization. Architecture The sophisticated, next-generation Commodity XL platform is built on Triple Point s n-tiered, Java EE compliant, Webenabled, highly flexible and scalable technology architecture. It offers super-fast processing that allows real-time valuation and position reporting for large transaction volumes. It provides concurrency across hundreds of users, Internet deployability, customizable desktops and reporting and open access via platform independence and native XML messaging. It quickly integrates with any operating system, application server, middleware or database. Conclusion Commodities, raw material and energy inputs are now a much larger and more volatile part of a company s cost structure. Therefore, while not traditionally viewed as commodity companies, Industrial Manufacturers must approach commodity procurement differently and more proactively than ever before. Commodity XL, the most advanced and comprehensive commodity management system, provides Industrial Manufacturers with the trading, hedging and risk management tools and practices employed by today s leading commodity and energy trading houses. About Triple Point Technology, Inc. Triple Point is the leading global provider of innovative software solutions to efficiently and profitably manage commodities and enterprise risk. Triple Point s growing, loyal customer base of over 260 companies represent all industries with exposure to energy and raw materials including oil and gas, coal, metals, agriculture, transportation, shipping, consumer products (CP), discrete manufacturers, and big box retailers. The company was named a Leader in Gartner s ETRM Magic Quadrant for its completeness of vision and ability to execute. Triple Point offers the only real-time solution to manage market/price, counterparty credit, operational, and regulatory risk on a tightly integrated platform. Founded in 1993 and headquartered in Westport, CT, USA, Triple Point employs over 600 people in 11 offices and support centers around the globe. How to Get Started To learn more about how Triple Point s revolutionary Commodity XL software solutions provide Industrial Manufacturers the market-lead solution for hedging systems and multi-market commodity and enterprise risk management, please contact us at: Triple Point Technology, Inc. Global Headquarters 301 Riverside Avenue Westport, CT USA Tel: Fax: Web: info@tpt.com AUTOMOTIVE SOLUTION BRIEF TRIPLE POINT TECHNOLOGY, INC. 6