Total margin management: the evolution of procurement and risk

2015 is likely to be remembered – not necessarily fondly – for challenging and volatile commodities markets. What’s more, no-one is suggesting that the new year will bring any change for the better. That means many commodity-exposed corporates have to re-think their whole approach to treasury, procurement and risk. In the more predictable markets of the past, treasury usually found it possible to manage these functions with a little spreadsheet wizardry, but this simply doesn’t give the visibility required to navigate today’s choppy waters.

Many companies with large commodity exposure do not have an integrated system that allows them to manage commodity procurement along with treasury and risk. Rather than commodity procurement risk management (CPRM) systems, many businesses have home-grown solutions; multiple – in some cases thousands of – spreadsheets; or an old legacy database. For one person to gain a clear picture of a company’s entire risk, cash and procurement picture within this context, they would require a computer memory!

Commodity-exposed corporates today could usefully look to learn the lessons of the energy markets from the past couple of decades. Roll back 20 years and energy trading was a relatively simple physical business where participants could manage their hedging on spreadsheets. However after the Enron scandal was exposed in late 2001 and the energy company imploded, the major banks jumped in and provided volatility – the industry became very sophisticated in a very short time. The banks introduced complexity around their basic management, risk and accounting systems, as well as other factors such as derivatives and exotic hedging strategies; all of which created an alphabet soup of checks and balances that make it hard to manage from a single place.

Many commodity-exposed corporates, such as those in the food and beverage sector and other manufacturing industries, today face the same level of complexity; not to mention new challenges around zero-based budgeting and how best to rationalize the IT landscape. The response from some forward-thinking firms is to move towards total margin management (TMM), which allows streamlining and integration of some of a corporate treasurer’s most important functions.

The benefits

By adopting TMM, a company can manage and monitor both margin creation and destruction from each and every part of the commodity value chain and source all processes into one singular, real-time platform. A company’s spending; the state of its treasury and its risk exposure are all related and must be kept in mind for all accounting decisions. So why should they all be run on different systems? Not only does doing so benefit a company’s bottom-line, but a unified system can also provide step-by-step accounting for compliance officers in a way that an Excel file simply can’t.

The Nirvana of any organisation with commodity exposure is to put all debt management, commodity management and risk management on a single platform with full transparency. Nirvana is of course tough to reach, but progress is being made towards it and TMM is an important step in the evolution of management for commodity-exposed corporates.


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