Are outdated ERP systems holding back food companies from efficiently managing commodity trading risks?

Here’s food for thought: effective risk management in commodity trading is crucial for achieving success in food businesses. Whether it’s sourcing, production or distribution- each part of the food value chain needs to be monitored, analyzed and reacted upon.

Most food companies lean on Enterprise Resource Planning (ERP) systems for their commodity risk management needs. It’s only with real-time visibility into physical, financial and contractual commodity exposures across the supply chain that a business can achieve a holistic and successful commodity risk program. Can an ERP system handle this responsibility?

An ERP system is supposed to help food companies in managing and optimizing their business processes. Ideally, it should take care of systems from purchasing, accounting, finance, human relations, and production to logistics. However, to what extent can companies actually bank on these systems? Commodity risks in food companies can come in many shapes and sizes. Can archaic ERP systems handle the nuances and swings of commodity markets? Here are a few key reasons that an ERP system may not be the best bet for commodity risk management for food businesses:

• Price fluctuations
  In the food industry, price swings are commonplace. Businesses try to source from suppliers at a constant rate and consistent quality. Since purchasing raw material is a core business operation, companies also try to mitigate market risk of fluctuating raw material prices. Even when it comes to production planning, one must ensure an adequate supply of multiple raw materials with optimized inventory costs. A legacy ERP system might not be able to fathom these constant swings. An ERP solution unfortunately is not designed to manage and mitigate potential trade risks resulting from pricing variation– a core purpose of CTRM systems.
  
• Hedging
  Managing volatility is a key goal for any commodity risk management program. Placing hedges in response to incomplete exposure information can further increase exposure instead of reducing it. For a food company this can happen when losses on hedges against raw material purchases take place with reduced selling prices requested in response to reduced input prices. ERP systems lack the functionality of managing hedge portfolios- a core function for food businesses. accurately tracking enterprise-wide market risk profile as described by such measures as Value-at-Risk (VaR), Mark-To-Market and other metrics become challenging as these values would have been calculated based on out-of-date information.
• Complicated contracts
  Sure, a straightforward purchase and sale contract can be handled by an ERP system, but when is the food business ever straightforward? A large volume of contracts, special scenarios, shipments and more need to be precisely captured in a system. It’s inevitable that market forces often necessitate frequent changes to these contracts, such as changing quantities or shipment modes. ERP systems cannot comprehend these requirements and aren’t designed to manage them.

Suffice to say, though ERP systems can be useful for other business processes, they were not designed for efficient commodity trading and risk management. ERP systems are meant to manage costs, logistics and compliance related to physical materials. Conversely, CTRM systems are meant to manage risks involved in commodity trade.

Many companies use ERP systems for commodity management. But this proves ineffective because of the unique situations, complexities, and nuances involved which can’t be managed by a system designed for generic business purposes. On the other hand, SaaS CTRM platforms can help translate data into exposure, track inventory, and focus on cash flow, positions and Mark to Market (MTM). The food industry faces a multitude of challenges on a day-to-day basis and businesses cannot afford to be held back by outdated legacy systems. To deep dive into the challenges faced by the food industry and how to overcome them, read our latest free eBook on ‘Food industry: Addressing the key challenges in trading and managing commodities’.