SAP Commodity Management

Bill Hamilton

SAP Commodity Management

April 17 2014

Global trends
Their impact on commodity management

Volatility

Regulation

Customer demands are increasing.

The balance between supply and demand

continues to tighten.

Geopolitical instability further fuels uncertainty.

Expansion of financial markets for commodities

impacts price liquidity.

Regulatory scrutiny is increasing and changing

everywhere.
Accounting
Derivative clearing
Hedging
Reporting
Cross-border movements
Taxes
Environmental and safety demands

There is strong demand for business solutions

designed to meet these requirements.

Risk

Risk management demands increased focus by top

levels of executives.

Corporate earnings are impacted by unpredictable

margins.

Availability of operating capital is constrained by

global banking liquidity.

SAPs approach to commodity management

Leverage SAPs core strengths in

logistics, finance, and industry solutions
Create a strategic investment area
within SAP Business Suite applications,
with a dedicated development and

solutions team
Collaborate with leading customers and
partners to build the solution road map

Commodity management business building blocks

Analytics
Quality mgt.
Commodity
purchase process
Commodity
trading

Warehousing
Transportation

Manufacturing

Commodity risk management

Accounting

SAP Business Suite

Commodity
sales process

SAP Commodity Management our integrated solution

SAP BusinessObjects portfolio

Commodity
Procurement
& Sales

Commodity Procurement

Materials
management
Global
Trade
Management

Purchasing

Commodity Sales

Commodity
pricing
engine

Sales and
distribution

Commodity Risk Management

SAP Treasury and Risk Management

Accounting (financials and controlling: FI/CO)

SAP Business Suite

Sales

Global Risk Report

CM Unleaded

GAL

Portfolio Details

CM Unleaded

GAL

2.9495
USD/GAL

Commodity Procurement
and Sales

Commodity procurement and sales

Capture
contract

Savings and
efficiency
gains in
procurement
and sales

Create call-off

Integrated
with
treasury

Transport and
delivery

Flexible
pricing

Provisional
invoice

Update quality
or price

Multiple
invoice
cycles

Differential
invoice

Fully
integrated
in standard
purchase and
sales order
screens

SAP Commodity Procurement and Sales

The SAP Commodity Procurement and Commodity Sales applications provide commodity-specific
functionality from capturing commodity contracts through logistics fulfillment to invoicing and
settlement including full integration with SAP Commodity Risk Management.
1

2
Capture
contract

Maintain quality
requirements
Link contract to
pricing formulas
and price
calculation rules
including forward
pricing and price
fixation
Define other terms
and conditions

3
Create
call-off

Create contract
call-off or spot
order
Specify delivery
day and quantity
Reprice using
quality factors and
formulas from
contract
Capture price
fixation

Transport and
delivery
Transportation
scheduling
Transportation
execution and
delivery
Goods receipt /
issue posting
Financial posting

5
Provisional
invoice

Create provisional
invoice based on
provisional period,
quotes and assay
results
Post to accounts
receivable /
payable
Payments of
invoices

Final
invoice

Update quality
Update qualities
and quantities with
latest assay
results from
external parties

Contract Revaluation
Daily revaluation of all documents based on
forward market prices
Updated contract values for Risk Management,
Credit Management and Mark-to-Market

Create final
invoice based on
final period,
quotes and assay
results
Post differential
amounts to
accounts
receivable /
payable
Payments of
invoices

Month End Revaluation

Calculate and post accruals

Market Data Handling

Upload market price data

Definition and calculation of commodity price curves

Commodity pricing for a typical commodity procurement

and sales process
VP procurement
and sales

Commodity
supplier

Products

Define quotation sources

Purchase
or sales
contract or
order

Upload market prices from

multiple sources (London
Metal Exchange, CME,
Reuters, NYMEX
or other reference prices)

Average both quotation values and currency

conversion values over quotation periods
One-time definition

Perform quality-based pricing on multiple

minerals and metals content
Agree on estimated quality with bonus, penalty
definition, and calculation rules
Define treatment charges
Define rebates and discounts

Commodity price
calculation

Goods
receipt

Provisional
invoice

First assay

Differential
invoice

Final assay

Final
invoice

Simplified Deal Capture Example

Complex Pricing for Commodities

Commodity pricing engine

Market price based
Formula driven
Quality characteristics
Formula editor
Reusable
Security based roles

Commodity Pricing Functionality

Order & Pricing Summary
Material a combination of commodity and non commodity pricing conditions

Commodity Pricing
Conditions
Tied to Market
Curve
Futures or Basis
Pricing

Customer Defined
Reusable
Physical
Revaluation
Contract Price

Market Price

Commodity Pricing Functionality

Pricing Elements Table
Material a combination of commodity and non commodity pricing conditions

Standard Pricing
Conditions
Quality
Freight
Brokers
Purity

All can be included

in formulas with
Commodity prices
and formulas
Tiers
Tables
Discounts

Commodity Pricing Functionality

4 Categories of Pricing Conditions

1.

Term Values - Maintains term status, priced

volume, market price & term definition

2.

Price Fixation - Allows for portions of the

contract to be fixed at a price, whilst
remaining volume floats against the market

3.

Term Settings - refines the Term Values with

the definition of Term and Calculation rules.

4.

Quotations - Captures the Quotation Period,

Quotation Source and the individual
quotations themselves

Commodity Pricing Engine Functionality

Discussion of Term Values

Price type

Covered Quantity
Formula/Term Keys
Averages
Reusable

Pricing Terms for Provisional final

Invoicing/Settlement

Commodity Pricing Engine Functionality

Discussion of Price Fixation
Convert Floating Prices to Fixed Prices per contracts

How to fix price

Quantity
Percentage

Buckets or Time
Periods

Commodity Pricing Engine Functionality

Discussion of Term Settings

Define which
business/contract
data will drive pricing

Specify price calculation is used

over the term e.g. average,
maximum, minimum

Commodity Pricing Engine Functionality

Discussion of Quotation Periods
The solution offers flexible Quotation Periods which are customer definable

Delivery period based

Move with changes
in delivery date

M, M-1 M+1

Further refined using

date offsets & Time UoM
routines

Commodity Pricing Engine Functionality

Discussion of Quotation Periods
Solution provides comprehensive exception management functions

Underlying market
calendars drive date
logic

Customers are free to define how exceptions are

managed

Commodity Pricing Engine Functionality

Quotations functionality

Period over which

quotations are
recorded
Quotation source and
type of price to be
recorded

Market quotations stored against the

contract and status of each quotation

Risk Reporting
Risk Breakdown of Purchase Order
Fixed Price Ethanol
exposure
(PO No. 4500018999)

Floating Price Unleaded

Exposure
(PO No. 4500018999)

Commodity Risk
Management

Commodity risk management

Managing
physical risk
exposure

Real-time
position
reporting

Assessing risk

Integrated
with
logistics

Executing
hedging
strategy

Deal
administration

Full suite of
commodity
instruments

Accounting
and settlement

Detailed
risk
reporting

Hedge
accounting

Fully
integrated in
hedge and
standard
accounting

SAP Commodity Risk Management

Process flow
The SAP Commodity Risk Management application provides robust functionality enabling companies to
identify and quantify their exposure to commodity price and foreign exchange risks on a real time basis
leading to effective risk management decisions.
1

2
Exposure
Management

Automatically created
exposures generated
from physical activity
Manage exposures
created from Demand
or Supply Planning
(forecasts)

3
Deal
Capture

Commodity-Based
Financial Instruments
Futures
Forwards
Swaps
Options
Exchange
OTC

Deal
Administration

Accounting and
Settlement

Validation of paper
deal (segregation of
duties)

Determine financial
positions
Manage margins
Perform month-end
valuation: fair value
calculation and
balance sheet and
income statement
postings
Settle financial deals
and create payments
(AR/AP)

Bilateral confirmation
handling

Hedge Accounting
Define hedge plans
Maintain hedging
relationships
Measure effectiveness
Create hedge
documentation
Post hedge accounting
results to the general
ledger

Risk Analytics
Real Time Position Analysis (physical & financial)
Mark to Market

Market Data Handling

Upload market price data

Optional

Definition and calculation of commodity price curves

Exposure management
Keeping track of the physical risk position

Aluminum

Risk management
Clear risk identification and efficient risk mitigation
Financial contracts (derivatives)

Broker/
bank

Futures
Listed options
Forwards
Swaps
OTC options

Treasurer

Financial Contracts

Commodity price risk

Aluminum

Managed price risk

Aluminum

Transaction management
Deal management and integration to accounting
Maintain master data

Maintain price curves

Month-end processing and integration

to accounting

Risk Management
Financial Instruments Example of a Future
Buy a Future to lock in price

Our solution supports the capture

and management of the following
financial instruments:
Futures
Listed options
Forwards

Swaps
OTC options

Risk Reporting
Example Position report After Hedge

Net
30,000 of
Floating
risk

Unleaded NYMEX Future to partially

hedge Unleaded Floating Exposure
(Transaction Number 1000000000609)

Risk Reporting
Mark to Market Report

Contract Value - Current

contract Price times
Contract Quantity
Market Value - Current
Market Price times
Contract Quantity
Mark to Market market
Value less Contract Value
Undiscounted and
Discounted

Solution Integration

Business Process Integration Overall

Logistic

Planning /
Forecast

Contract

Order &
Call-Off

Delivery &
Transport

Invoice &
Billing

Inventory

Quality

Invoice &
Billing

Procurement

**

Requirement

Purchase
Contract
(MM-PUR)

Purchase
Order
(MM-PUR)
CP

Delivery &
Transport
(LE-TRA)

Goods
Receipt
(MM-IM)

CP

Provisional /
Differential
Invoicing
CP

Batch
Management
(LO-BM)

Final
Invoicing

CP

CP

Stock

Trade

Trade
Contract
(GTM Pre TC)

Vendor Billing
Document
(GTM
Expenses)

Trade
Order
(GTM TC)

CP

CP

CP

Sales

Stock

**

Demand

Sales
Contract
(SD-SLS)

Delivery &
Transport
(LE-TRA)

Sales Order
(SD-SLS)
CP

Goods
Issue
(MM-IM)

Provisional /
Differential
Billing

CP

Batch
Management
(LO-BM)

Final Billing

CP

TRM

CP

Optional
Hedge Plan
Raw
Exposure

Exposure
Position

Reporting

Financial
Instrument
Hedge
Management
Exposure

Identify Risks

CP

Commodity Pricing

Measure & Monitor Risks

Mitigate Risks

Hedging
Relationship

Hedge Management
(Hedge Accounting)

*** Does not necessarily be reflected by a SAP business object - any kind of demand / requirement

Optimize Commodity Management

Commodity Risk Management
SAP ERP
Operations SD, MM
or GTM

Exposure Manager

Integrate Physical Transactions

Hedge Manager
Review Hedges

Excel
Spreadsheets

Transaction Manager

Forecasts

Reporting

Other sources

SAP ERP Financials

Enter Financial Transactions

Risk Reporting

Value Proposition

Learnings from a customers - the SAP value

proposition
Pricing rules
Challenge: Commodity buyers need industry-standard pricing rules around prices and qualities along with companyspecific pricing rules to maintain their competitive advantage.
SAP solution: SAP's commodity pricing functionalities provide buyers with out-of-the-box industry rules but also allow
definition of customer-specific rules without software modifications.

Governance for pricing

Challenge: In the move to centralized procurement organizations, companies need the ability to govern from afar while
providing local facilities flexibility within set parameters.
SAP solution: SAP Commodity Management allows organizations to set up auditable governance paths between
different units of the organization through specific authorization and control concepts.

Integrated supply chain procurement hedging

Challenge: In the move to imbed commodity procurement and hedging as part of an integrated supply chain planning
and optimization process, companies need the ability to see the impact of commodities on all aspects of their
operations.
SAP solution: SAP Commodity Management is fully integrated into supply chain planning, procurement, finance, risk,
and accounting.

TCO benefits: SAP Commodity Management

One solution eliminating

the need for multiple
interfaces

Direct integration with other critical

business processes such as materials
management, production, materials
requirement planning, and so on.

One solution reducing

overall software and
support cost

Reporting through existing analytics

applications and tools

SAP Commodity Management

leverages SAPs proven solutions
in logistics, finance, and industries

SAP Commodity Management delivers best-in-class functionalities

Efficient procurement, conversion, and sales

Flexible costing and pricing
Real-time position and risk reporting

Integrated logistics, risk management, and finance

Compliant hedging and accounting

Thank you
Contact information:

Contact information:

Bill Hamilton
Director Commodity Management
Bill.hamilton@sap.com
Chicago
309.989.0609

Rich Weiss
Commodity Management Sales
Richard.Weiss@sap.com
New York
(516) 263-9515

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