By Shobhit Mathur
The appeal of Enterprise Resource Planning (ERP) software is understandable. It is a proven technology. It is made available by well-known and trusted brands. Its suppliers have deployed solutions in a wide range of industry sectors, business types and organizational structures. And ERP analysts and developers have a huge pool of practical experience from which to draw on and learn.
What’s more, ERP solutions come with promises of cost and operational efficiencies. Plenty of business functions can be performed by a single system, minimizing the costs of licensing, upgrade, management and maintenance.
Thus, having invested time and resources into an ERP system, it’s tempting to think that it can be adapted to manage commodities — especially since ERP providers are making this claim. However, ERP systems were not designed to meet the unique and complicated needs of the commodities business. The level of customization needed to create a system that can handle all the variables, risks, interdependencies and volatilities of the commodities business is extensive. And a system that has that level of customization rapidly becomes expensive to maintain and difficult to enhance — and almost impossible to upgrade.
A CRTM system, on the other hand, has been designed from the outset to meet the specific and complex needs of the commodities industry. It features better functionality, better risk management and, consequently, better ROI than a customized ERP system. CTRM software solutions have been built with the functionality and adaptability to support changing commodities markets. Consider the way that commodities are bought, sold, shipped, stored, invoiced, accounted for and valued throughout the supply chain. Unlike most manufacturers, commodities businesses are working with prices and valuations that can change at a number of stages in the supply chain. An ERP system designed to handle fixed-price input costs provides little support to commodities buyers who are dealing with un-priced, index, NPE (no price established) and other more complex pricing types and cost models.
Fundamental differences like this extend into almost every aspect of the commodities business. Unlike CTRM systems, ERP systems struggle to create a contract where there is no defined price and where various exchanges and exchange types produce hourly, daily or monthly market prices. They do not have the ability to handle exposure reporting or provisional invoices. Perfectly suited to fixed-price procurement situations, ERP software require the most serious modification to deliver mark-to-market valuations for physical positions and the ability to handle financial trades along with their lifecycle.
The commodities business is one of daily variations and constant volatility, of complex supply chains across hundreds of counterparties, global exposures and rapid decision-making. It’s about as far from the ERP comfort zone as it is possible to get. This means that ERP systems also fail to deliver on the extensive risk and compliance needs that regulators and other stakeholders demand. The ability to handle these grass-root requirements isn’t something that can be simply added on a generic ERP solution and then used to manage commodities. These need to be the core element of the system’s architecture.
Consider the all-too-common situation where a trader needs to make changes several times throughout the life of a sales contract, such as allocating and later deallocating contracts to a vessel, changing destination ports, and moving the pricing between shipments. These activities are easily managed in a CTRM system, but would be either impossible or extremely tedious to perform in an ERP system.
ERP is acceptable if you’re simply purchasing or procuring raw materials at a fixed price, in a fixed place, at a fixed time. But if you’re dealing in commodities and the associated risk and volatility, logistics and supply chains, then even the most sophisticated customizations will not make it the right solution for you.
Shobhit Mathur is vice president, commodity analytics at Eka Software Solutions.