Gaining Greater Control Over Commodity Planning & Procurement for Manufacturers

Gaining Greater Control Over Commodity
Planning & Procurement for Manufacturers
Thad Malit,
Director Treasury & Commodity Risk
Management Consulting,
Deloitte & Touche
Michael Schwartz
Executive Vice President & Chief
Marketing Officer,
Eka Software Solutions

www.ekaplus.com
Agenda
2
Featured Speaker: Thad Malit, Deloitte
• Challenges facing organizations in the
current market environment
• How are these challenges impacting
companies?
• Benefits of an integrated approach
Eka Background and Solutions
• About Eka, Customers, Global Presence
• Next-Generation Smart CM Platform
• Eka.Commodity Planning & Procurement

www.ekaplus.com
Featured Speaker
3
Thad Malit
Director Treasury & Commodity Risk
Management Consulting, Deloitte &
Touche
• 18 years of experience in developing,
implementing and integrating commodity
risk management programs and solutions
for Deloitte & Touche clients
• BA, Economics, BS, Political Science
(University California Los Angeles)
• Leads the Commodity Risk Management
services for the US Audit & Enterprise Risk
Services (AERS) Consulting in the traded
commodity practice

Treasury & Commodity Risk Management
Challenges, Risks and Considerations for Consumer
Product (CP) and Industrial Manufacturing Companies

Copyright © 2014 Deloitte Development LLC. All rights reserved.
5
Background
• Volatility associated with rising commodity prices has a direct impact
on raw material ingredients, such as grains, vegetable oils, and sugar.
• Higher energy feedstock and transportation costs are adversely
affecting production costs.
• To increase cost predictability, it is critical for Consumer Product (CP)
and Industrial Manufacturing companies to understand, design and
implement consistent and disciplined commodity procurement
and risk management programs that entails upfront alignment of the
company’s risk profile with overall business strategies and objectives.
• This session will focus on key commodity risk management tenets that
multinational corporations in the CP & Industrial industries should
consider in today’s current volatile environment.

6
Many multinational corporations share similar risk profile characteristics:
1. Seeking to leverage internal commodity and treasury financial expertise to improve
commodity price and foreign exchange risk management and further align business
units and organization on strategic objectives, margin performance, and earnings
volatility mitigation
2. Seeking to improve cash mobilization by developing customized cash management
and liquidity solutions to reduce external borrowings, repatriate cash and optimize
investment returns
3. Developing/improving comprehensive and integrated management of commodity and
treasury (FX) risks via centralized risk oversight at corporate level
4. Revising and broadening risk committee roles and responsibilities for oversight, and
monitoring of forecasting, execution, management, and reporting of commodity and
currency price risk exposures
In today’s challenging commodity markets, the primary objectives at peer organizations
focus on price volatility impact on margins over transacting and risk management
operational costs.
Organizational challenges

7
Commodity Risk Management Capability Maturity Model
Integrated
Strategic
ComprehensiveFragmentedInitial /
Ad Hoc
Comprehensive
 Policies define some
relevant aspects of
corporate risk management
 Risk management spans an
array of activities at the
business units
 Risks and risk management
are related to strategic
objectives
Integrated
 Policies define most relevant
aspects of risk governance
and oversight
 Risk Management is
integrated across business
units and with strategic
planning
 Risk treatment strategies and
approaches are fully
integrated across the
organization
Fragmented
 Corporate Risk
Policies/Objectives are
mainly undefined
 Risk management is
established function
within certain business
units
 Risk activities are
performed by small
number of specialists in
certain risk areas
Strategic
 Policies define the relevant
aspects of risk governance and
oversight
 Risk management activities
focus on value creation as well
as value preservation
 Risk management is a source
of competitive advantage used
to identify and pursue business
opportunities
Initial/Ad Hoc
 Risk
Policies/Objectives
undefined
 Risk
processes/controls
inconsistently applied
 Risk response at
individual level and
primarily reactive
Descriptors
Risk Quality
Peer companies respond to increasing complexity of risks in volatile global economic conditions
through renewed focus on more integrated and strategic risk management capabilities.
Deloitte’s commodity risk
management maturity model
As used in this document, “Deloitte” means Deloitte & Touche LLP, a subsidiary of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its
subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.

8
Integrated and consistent risk management is built on a framework that aligns key functional areas with
the foundation elements of risk policies and processes to achieve the desired state of risk capabilities.
Functional
Areas
Foundation
Elements
Desired
State
Technology
Risk Management
Strategies & Policies
Processes
Technology
Organization
Structure
• Governance and Risk
Management Committee
• Treasury , Commodity and
Business strategies/objectives
are aligned
• Processes support strategy
execution and metrics are
used to measure the
effectiveness of risk
mitigation plans
• Organization structure has
been designed to leverage
technology, align with
corporate strategies and
support a sound control
environment
• Technology provides timely
information for decision
making and modeling
Assessment
Technology
Technology
Technology
Technology
Funding
&
Investm
ent
Finance
&
Controllership
Risk
&
Exposure
M
anagem
ent
Treasury
Operations
O
perations
M
anagem
ent
Developing a sustainable risk
management approach

9
Objectives Typical Strategies Risks
• Leverage national/global
market expertise
• Achieve lowest delivered price
• Manage market volatility to
reduce average price
• Manage price volatility within
risk limits
• Profit from price volatility
• Improved price discovery
• Active management of spot and contract
purchases to lower hedging costs
• Sophisticated use of contract optionality
• Active hedging strategies: i.e., cross-
commodity hedges, FX
• Opportunistic physical and financial
trading
• Commodity Risk Management is
integrated with Treasury Risk
Management into a central function
responsible for price risk management
across all businesses
• Requires tighter risk management of
exposures
• Requires more robust analytical tools to
support strategies
• Additional administrative and credit risks
associated with higher volumes with
more counterparties
• Greater price certainty (i.e., lock
in margins)
• Minimize volatility
• Supply reliability
• Long-term physical supply contracts
(“contractual hedging”) at fixed prices
• Physical or financial forwards to hedge
exposures at current prices
• Coordination exists between corporate
risk and commodity hedging function
• Trade-off price certainty with lower
opportunity to achieve lowest cost
• Requires additional investment people,
processes, tools
• May not fully mitigate pricing
disadvantage relative to “effective
commodity managers”
• Accept market prices
• Assume costs will be no worse
than current market prices
• Fix contract prices at spot market prices or
forward index prices
• Margin risk strategies rely on contract
negotiation, volume discounting, product
sales price increases or surcharges
• Typically rely on physical contracts with
limited “plain vanilla” financial hedges
• Pricing determined primarily at business
unit level
• Complete exposure to market price
swings
• No protection from higher prices
• Spot prices may exceed annual budgeted
cost targets
“Effective Risk
Managers”
“Hedgers”
“Price Takers”
Styles of commodity risk management

10
Strategic alignment at the
Enterprise level:
 Business Strategy
 Pricing Strategy
 Procurement Strategy
 Hedge Strategy
Link tactical business unit pricing,
procurement and hedging
strategies with corporate risk
objectives, budget, and
organizational goals.
 Diversify sourcing points (further
upstream, new relationships, new
contract structures).
 Leverage contract optionality for
better value
 Use risk-based valuation methods
to better value inventories, and
measure credit exposures in the
long/short term.
 Hedge margins by using financial
instruments or physical
transactions.
 Develop centralized price risk
management (enterprise
level)
 Improve risk oversight and
reporting
 Provide additional price
protection through derivatives
 Leverage market
knowledge/skills
 Develop enhanced analytical
capabilities to support
improved risk management
CorporateProcurement
How well do you balance needs of decentralized procurement functions with the risk objectives of a
centralized, corporate risk oversight function?
Aligning business unit and corporate objectives also requires designing useful performance metrics
and risk reporting with the right Commodity Transacting & Risk Management (CTRM) systems support.
Aligning tactical objectives with
corporate risk objectives

11
• Are risks being communicated and shared on an enterprise level to assure that effective risk management is
occurring not only within the business units but also at the enterprise level?
 How does Senior Management think strategically about risk and return? Are hedging strategies,
performance metrics, risk metrics aligned with risk/return?
 Are all relevant risk exposures across the business units/functions appropriately aggregated into senior
management risk reporting?
 Are risk metrics consistent with level of complexity of products, instruments, strategies, and accounting
requirements. Is stress testing used to evaluate portfolio sensitivity to unanticipated market, or
economic events?
• Do we have segregated and independent risk management at the operational level?
• Are there procedures in place to identify new or emerging risks and how their potential impact is addressed?
• Does the organization have the appropriate tools and technology infrastructure to support their risk
management practices?
• Do individuals with risk oversight responsibilities have the skill sets appropriate for the complexity of hedging
activities and risk measurement?
Are we getting the right information to exercise our risk oversight responsibility?
Questions being asked by senior
management

12
 Internal cash mobilization to reduce working capital needs and borrowings
 Reduce idle cash and interest cost of financing
 Accessing external capital and cost of capital
 Lower borrowings/interest improves borrowing capacity
 Margin risk management
 Earnings volatility
 Trade-off between accounting hedges/economic hedges
 Managing financial market volatility
 Foreign currency risk impacts to earnings
 Commodity price risk impacts to costs and margins
 Counterparty credit risk concerns
 Ensuring safety of investments
 Managing counterparty failure/buyout risk
 Supporting organizational efficiency improvement and cost containment goals
 Operational efficiencies and ROI on new CTRM technologies
Commodity and financial market uncertainty increases the breadth of challenges with
multiple business risk factors.
Current market challenges for
corporate finance

13
 Does your tax and transfer pricing strategies complement your cash mobilization and inter-company
funding approach?
 Does the company have idle cash in certain markets that could be better deployed to reduce
borrowings or improve investment returns?
Cash Management
 Do your hedge accounting policies and procedures support your hedging activities?
 Do foreign currency risks affect business operating costs and pricing strategies?
 How does the company manage profitability with fluctuating commodity costs?
 Do you have visibility into all your counterparty risks and proactively monitor?
Risk Management
 Does your Finance infrastructure support a portfolio view of risks and available cash?
 Are Finance and Treasury working together to centralize certain functions to improve efficiencies e.g.
shared service centers for payables, receivables, account reconciliations?
 Are cost efficiencies achievable through investments in new CTRM technologies – what is the ROI?
Operational
Management
Cost Management
 How is the company addressing the increased scarcity and cost of capital?
 How much are you spending on bank fees globally?
Identifying opportunities to proactively address these challenges can positively impact the bottom line.
How are these challenges impacting
corporate finance?

14
Functions Advantages Challenges
Commodity Risk
Management and
Foreign Currency
• Centralization of risk management improves oversight and
controls and allows for natural offsets to be realized
• Improves alignment of strategies with risk tolerances
• Global / Regional ERP or G/L systems linked to treasury
and/or commodity risk management systems can improve
exposure aggregation and management
• Provides risk management center of expertise and knowledge
• Can provide greater transparency around performance vs.
strategy/risk objectives
• Resistance from business units who have historically regarded
these risks as theirs to manage may create resistance to
change. Change management needed
• Potential for a lack of local intelligence and knowledge on market
fundamentals in offshore markets as well as local tax issues and
changes
• May involve a fundamental change in how risks/performance is
measured across different business units
Centralized
Foreign Exchange
& Commodity
Hedging and
Transacting
• Centralized responsibilities for transaction execution and
validation promotes adherence to Policy requirements (i.e.,
limits, authority levels)
• Promotes closer integration of hedges with forecasts and
strategy
• Reduces administrative and IT operational redundancies and
costs
• Potentially slower reaction to local market price events
• May involve fundamental changes in transacting authorities and
responsibilities
• May require significant upfront investment in process and
technology enhancements
• May require additional system or analytical capabilities for
performance metrics and transfer pricing methodologies
Cash and liquidity
management:
• Cash Forecasting
• In-house Banking
• Cash positioning
and cash
management
• Potentially better cash forecasting through alignment with
central finance infrastructure
• Relieve local operations of some treasury/banking activities
• Global reporting of cash positions and risk management
exposures
• Potentially better pooling of cash balances, FX exposures
and reduced interest charges
• Better alignment of risk strategies, intercompany funding
activities and tax strategies
• Treasury center is further removed from local business needs
and there is potential organizational resistance to giving up
control of cash
• Local entities may require more cash on hand due to reduced
responsiveness of central treasury to meet funding requests due
to time zone differences
• Further removed from local businesses and operations hinders
communication on cash flow activities
Accounting for
treasury
transactions and
funding
• Ability to leverage a single system to automatically record and
track external inter-company transactions and funding
• Improves controls and monitoring
• Improves reporting capabilities
• Likely to require treasury or ERP system enhancements to track
multi-currency nature of external and intercompany activities
Integrating commodity risk helps to
meet challenges

15
Enhanced Operational
Efficiency and Costs
• Reduced processing
redundancy
• Straight-through processing
through deployment of
technology
• Reduced bank fees
• Automated transaction
processing
Tax
• Sustained effective tax rate
management and cash tax
cost reduction
• Identify and manage tax risks
which impact total return on
cash
• Maximize tax efficient
repatriation of offshore cash
Proactive Risk Management
• Hedging strategies that
support business objectives
• Better visibility to and
monitoring of risks
• Reduced earnings volatility
Hedge Accounting
• Minimize volatility from debt,
foreign currency, commodity
and interest rate exposures.
Improved Cash Mobilization
• Enhanced ability to manage
cash/liquidity through
improved visibility to global
cash
• Cash mobilization through
release of idle cash "trapped"
in the pipeline, thereby
improving cash flows
Integrated
Finance
Organization
The integrated finance organization

16
• Unclear organizational roles and responsibilities limits
accountability for risks and effectiveness of controls
• Undefined risk governance structure and decision framework
may hinder risk awareness and lead to financial surprises
• Inconsistent risk management processes and procedures
across business units and geographies creates inefficiencies
and hinders transparency to risks
• Reliance on manual processes and a lack of enabling
technology may add to operational inefficiencies and costs
• Inconsistent internal control environment leading to operational
losses and fraud
• Undefined risk exposure identification and reporting leading to
unexpected risk exposures and financial surprises
• Hedge documentation that is not aligned with the measurement
and review of financial performance leads to sub-optimal
strategies or inaccurate financial reporting
• Well defined roles and organizational boundaries to ensure
accountability and maintain a sound control environment
• Established governance structure to monitor risks to
strategies and take actions to mitigate
• Standardization of risk management practices improves
transparency to risks, fosters efficiencies through using
technology and improves internal controls
• Use of enabling technologies to automate exposure capture,
transaction flow, report generation and account postings to
improve efficiencies and reduce costs
• Strong internal control environment reduces operational risks
and losses
• Risk mitigation strategies aligned with corporate objectives
and timely exposure reporting
• Sophisticated risk analysis and performance measurement
link financial accounting requirements and business
objectives provide transparency and to assist decision making
Current State Integrated
Our experience has shown that there are significant benefits in the transformation toward an Integrated
Risk Management Model
Integrated risk management:
potential benefits

Eka Smart Commodity Management
Commodity Planning & Procurement for Manufacturers

www.ekaplus.com
18
System Focus
• With commodity prices relatively stable since WWII
(1970s oil embargo not systemic), focus on supply
chain efficiency and cost reduction:
• Lean manufacturing
• Six Sigma quality programs
• Supply chain optimization
• Resulting in lower buffer inventory and
complex supply chains
• System investment to support above focus
• ERP, MRP, Purchasing Systems
• Commodity Management typically handled in multi-
tab, error prone spreadsheets
With 40-60% of costs in
raw materials,
packaging and energy
Systemic high
commodity volatility
Commodity
Management is the
Next Big Supply Chain
Issue

www.ekaplus.com
19
Timeline – ETRM to Smart Commodity Management
1990 2003
2003
2014
2008
2008 2014
ETRM
Energy Commodities
• Oil
• Power
• Natural Gas
Additional Commodities
• Ags
• Metals
• Biofuels
Broader Footprint
• Supply Chain
• Compliance
• Manufacturing
Data to Foresight
• Predictive Analytics
• Visualization
• Optimization
CTRM
CM
Smart CM

www.ekaplus.com
Eka Software Solutions: Company Profile
Position: Global leader in on premise & cloud served Smart Commodity Management solutions
Founded: 2004
Employees: 315
Global Offices: 7 offices. 3 development & support centers
• Americas: Stamford CT HQ, Calgary AB
• Asia Pacific: Bangalore India, Singapore, Adelaide & Perth AU
• Europe: London UK
Investors: Silver Lake Partners - GP Group - Nexus Venture Partners
Customer Base: >50 leading global enterprises on 4 continents
• Cargill, Rio Tinto, Mitsui, Bunge, BMA, EDF Trading, Graincorp, Viterra, Louis Dreyfus, Noble,
CBH, Mitsubishi, Pinnacle Foods, Twin Eagle, Boliden, Tata Steel
Solution: InSight Commodity Management (CM) Platform
• End to end financial and physical transaction management
• Cross asset trading and position management – Ags, Energy, Metals, and Bulk
• State of the art enterprise risk management
Commodity Analytics Cloud
• Analytics specific to commodities
• Multiple data sources internal and external to Eka
• Prebuilt and custom apps
20

www.ekaplus.com
Perth
Global Market – Global Customers – Global Engineering & Support
21
Singapore
London
New York
(CT)
Adelaide
Development & Support Centers
Bangalore
Eka Offices
Calgary

www.ekaplus.com 22
Customers
A G R I C U LT U R E & C P
M E TA L S & M I N I N G
E N E R G Y

www.ekaplus.com
Intelligent. Integrated. Innovative.

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Management Overview
25
• Monitor critical areas of
business in real-time
• Leverage graphical insights to
optimize planning
• Use all types of graphical tools
(bar, pie, line, etc.) for best
analysis
• See reports at all levels and
share to permissioned groups
• Enable user-controlled
enhanced analysis

www.ekaplus.com
Coverage Insights
26
• View coverage - inventory,
physical forwards, and
derivatives combined
• See real-time updates to
coverage and where action
is required
• Simulate coverage under
various market conditions
• Create mark-to-market for
variance analysis
• Monitor coverage against
budget and forecast

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Spend Analytics
27
• View detailed &
complete spend analysis
• Understand variances to
budget & forecast
• View historical trends,
current spend and
projected spend based
on what-if scenarios
• Analyze commodity &
secondary costs
• Drill by business units,
costs, buyers, etc.

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Simulation and Scenario Analysis
28
• Analyze multiple predictors
of business results
• Run real-time, complex
scenarios
• Automate export to Excel
for additional analysis
• Simulate with user-
controlled, visual tools
• Understand likely spend vs.
budget or forecast

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Supplier Performance
29
• Compare supplier
performance vs. plan
• Analyze performance trend
• Understand supplier
delivery timeliness with
quantity and quality
delivered
• Monitor supplier payment
terms vs. quantity
delivered
• Analyze supplier by
location, commodity,
grade, freight costs, etc.

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Period to Period Changes
30
• Compare last year vs current
year
• Analyze any period to period –
annual, 2 year, month, etc.
• View real dollar change vs.
inflationary change
• Normalize for FX changes
• Understand changes by
business unit, location,
supplier, commodity, etc.

www.ekaplus.com
31
• S top the information Olympics - gain confidence in the data
• M onitor coverage in real-time and understand needed actions
• A nalyze performance versus market
• R un real-time, complex simulations and scenarios
• T rack variances from budget and forecast
• C ompare suppliers performance vs. plan and forecast
• M anage with real-time or near real-time decision making information
Compliance / Risk PolicyBenefits
Eka Delivers:

USA
Two Harbor Point Square
100 Washington Boulevard,
Stamford, Connecticut 06902
United States of America
T: +1.203.810.4250
EUROPE
2 Sheen Road
Richmond , TW9 1AE
United Kingdom
T: +44.208.973.2683
AUSTRALIA
Level 5 185 Victoria Square
Adelaide 5000 SA Australia
T: +61.0.4479.77831
SINGAPORE
17 Phillip Street
Grand Building 05-01
Singapore 048695
Tel No: +65.8363.2635
INDIA
Embassy Tech Village, Phase II
Aster Building 2A, East Tower
Devarabeesanahalli, Outer Ring Road
Bangalore 560 103 India
T: +91.80.40819200
CANADA
Suite 730, 734 - 7th Avenue SW
Calgary, AB , T2P 3P8
T: +1.403.237.7740
Download Webinar Recording:
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