Risk management in procurement new challenges or new opportunities?

Transcription

3 Contents 1. Survey background Survey demography and reference model Risk management direction setting Risk analyses Risk actions Supporting methods, tools and systems The way forward for commodity risk management Strategic commodity risk management survey 2011 All rights reserved 3

5 1. Survey background This survey was conducted in 2010/2011 with 169 respondents. The survey is a collaboration between: Kairos Commodities Vesterbrogade 149, DK-1620 Copenhagen V Tel: info@kairoscommodities.com Valcon Christianshusvej 187, DK-2970 Hørsholm Tel: valcon@valcon.dk Danish Purchasing and Logistics Forum (DILF) Vesterbrogade 149, DK-1620 Copenhagen V Tel: mail@dilf.dk Aarhus School of Business Fuglesangs Allé 4, DK-8210 Aarhus V Tel: asb@asb.dk The research team Lasse Hvid-Jørgensen, Kairos Commodities Anders Aagesen, Kairos Commodities Søren Vammen, Kairos Commodities Stig Jessen, Valcon Torben Tæstesen, Valcon, Morten Munkgaard Møller, Aarhus School of Business/DILF Jon Hughes, Future Purchasing Supporting purchasing institutes They survey was kindly supported by a number of the European Purchasing Institutes and the research team wish to warmly thank for this support. The supporting purchasing institutes are: ADACI in Italy AERCE in Spain BMÖ in Austria Centrale Paris Achats & Supply Chain in France DILF in Denmark NIMA in Norway HALPIM in Hungary NEVI in the Netherlands SILF in Sweden ZNS in Slovenia ÖPVZ in Austria Strategic commodity risk management survey 2011 All rights reserved 5

6 1. Survey background Risk management in procurement new challenges or new opportunities? Survey 2011 Executive summary This Whitepaper is being written as oil prices close in on the level of $ per barrel; the UN Food & Agriculture Organisation s Food Commodity Price Index breaks through to its highest ever level; and with copper and iron ore at all-time highs. Many had hoped that a benign benefit of recession would be a slowing down in the commodities super cycle of sharply rising prices. Alas, not so. For companies exposed to commodities or commodity driven products strategic commodity risk management is therefore of huge importance. The aim of the survey is to uncover current practice within strategic commodity risk management in European companies. We all know there is a big difference between companies procurement maturity levels this survey shows that the differences within strategic commodity risk management are extreme. Key findings 1. 45% of companies have no commodity risk strategy in purchasing on how to address their total spend. 2. Risk management is characterised by sub-optimisation 69% have commodity risk co-ordinated by purchasing and 65% currency risk by finance. Only approximately 3 have an integrated approach. driven by contract expiry date and not based on a dynamic commodity market analysis. Timing really matters. Yet 76% have a fixed approach, rather than flexing it to reflect commodity market dynamics. 8. Prime sources of commodity price forecasts are the suppliers. 78% list suppliers as prime source! 9. 46% of the companies have no intention of developing a commodity risk strategy. If you are one of these companies, we would suggest that the last one out turns off the lights. 10. There seems to be a harsh selection race going on between those companies who take commodity risk management seriously and those who don t. We know from several case studies that the difference in financial performance between laggards and best in class is in the range of 50-75% measured as bottom line impact. There is no other area in a typical manufacturing company where the ROI is as high as in the strategic commodity risk anagement area. But of course you need to insert coins to hit jackpot! We recommend you rather do that today than tomorrow! Enjoy the reading of this whitepaper we guarantee you a very high ROI if you actually act on the recommendations on page Only on 56% of the spend there is a deep understanding of cost drivers behind major categories of the respondents have a strategy for dealing with risk on energy 5 have no strategy of the companies do quantify the bottom line effect of price fluctuation on essential commodities. 5 of companies do not do this. 3 have no systematic cost driver analysis and 4 only do it yearly, or less frequently of the respondents don t have defined procedures for execution of hedging via financial markets. 7. Renegotiation is taking place with fixed frequency 6 Strategic commodity risk management survey 2011 All rights reserved

7 Survey demography and reference model 2

8 2. Survey demography and reference model 2 18% 16% 14% 12% 1 8% 6% 4% 2% Less than 10 million Euro Figure 1. Respondents turnover : 35% : 4 : 25% million Euro million Euro million Euro million Euro million Euro million Euro million Euro million Euro 800-1,000 million Euro 1,000-1,500 million Euro 1,500-2,000 million Euro 2,000-2,500 million Euro 2,500-3,000 million Euro 3,000-4,000 million Euro 4,000-5,000 million Euro 5,000-6,000 million Euro 6,000-7,000 million Euro 8,000-10,000 million Euro More than 10,000 million Euro The distribution of the size of the respondent companies is shown in figure 1. The company-size is divided into three groups: 35% small, 4 medium-sized and 25% large companies. Denmark 27% Netherlands 24% Austria 16% France 1 Italy 5% Spain 5% Norway 3% Slovenia 2% Other 8% Figure 2. Respondent origin distribution A total of 17 countries have participated in this survey. The origin distribution of the respondents is illustrated in figure 2. As seen from figure 2, the most respondents originate from Denmark and the Netherlands. The top 4 countries (Denmark, Netherlands, Austria and France) account for 77% of respondents providing the survey with a well-diversified origin fundament. Those who have completed the questionnaire are primarily manufacturing companies which are shown in figure 3. Construction company 2 Manufacturing company 68% Pharmaceutical company 5% Whole sale trading and retailing 4% Other 3% Figure 3. Respondent industry distribution 8 Strategic commodity risk management survey 2011 All rights reserved

9 Valcon = Value Consulting Value creation is the aim of everything we do. More than 150 consultants with strong competences in strategy, operations, finance, innovation and sourcing. Scandinavian presence in Denmark, Sweden and Norway and international offices in the Czech Republic, India and China. Read more: Management Consultants

10 2. Survey demography and reference model Figure 4 shows that a 40/60 ratio between direct and non-direct spend is the profile among most respondents. Direct 35% Energy 9% Personnel 8% Logistics 7% Capital costs 7% CAPEX 7% MRO 6% Packaging 5% IT and telecommunications 5% Facility 4% Marketing 4% Professinal services 3% From figure 4 it can be concluded that, Direct (BOM goods) covers 4 of spend and indirect categories cover 6 of the respondent companies spend. There are large deviations in spend on direct vs. indirect but many companies tend to share the 40/60 distribution. The total spend covered by this survey is 226 bn. Reference model Figure 4. How do you distribute your spend between the following categories (percentage)? This commodity risk survey is built around our reference model, which covers key dimensions of commodity risk management within purchasing. This reference model is depicted in figure 5. Risk management direction setting: Risk strategy and risk value proposition, risk organisation, risk measurement, risk competence development and training Market and corporate input Risk transparency Risk management Category mgmt. integration Analysis Market and corporate strategy Risk analysis Risk Risk identification assessment Risk mitigation Risk action plans Follow-up activities Action Organisational alignment, especially sales and finance Supporting methods, tools and systems Figure 5. Reference model. Source: Valcon/Kairos Commodities A/S (all rights reserved) 10 Strategic commodity risk management survey 2011 All rights reserved

11 Risk management direction setting 3

12 3. Risk management direction setting Avg. 38% Many companies have a risk and/or commodity risk strategy, however spend of more than 80 bn has no directional setting when it comes to commodity risk Don t know No Yes Figure 6 shows that an average of 38% of the respondents has developed a risk strategy, and that the larger corporations are further developed in this field than the small and medium size corporations. Figure 6. Does your company have a strategy for risk management that covers risks of the whole company (including supply risks, market risks, organisational risks, etc.)? Further, figure 7 shows that an average of 55% of the respondents has a commodity risk strategy in the purchasing department and that all three groups show roughly equal responses to this question. From figure 6 and 7 it can be concluded that 31% Avg. 55% of the respondents have neither a companywide risk strategy nor a commodity risk strategy in purchasing. 24% has both. 45% of the respondents have no com % of respondents modity risk strategy in purchasing on how to address their total spend of more than 80 bn, which is de- 2 picted in the red box in figure 7. 1 Don t know No Yes Figure 7. Does the purchasing department have its own risk management strategy covering commodity risk management? The companywide risk strategies reflect the traditional focus areas such as budget accuracy, which is shown by figure 8. The major focus of the companywide risk management strategy is based on figure 8 to: Minimise budget deviations Increase probability of strategy realisation Secure income stability Almost all respondents who have a companywide risk strategy incorporate these focus areas in their risk management strategy Minimizing budget deviations Increasing the probability of the company reaching its strategic goals Securing stability in income Securing that the company accepts the risks according to the strategy Reducing the probability of the company going bankrupt Minimizing the risk related costs Eliminating risks Creating overview of risk exposure To a very high degree To a high degree To some degree To a low degree Not at all Don t know Figure 8. To which degree do the following statements reflect the aim of the company s risk management strategy? 12 Strategic commodity risk management survey 2011 All rights reserved

13 3. Risk management direction setting Figure 9 however shows that the purchasing department is focusing on beating the market. What can be concluded and drawn from this is that the risk appetite within the companies differs and needs to be aligned. The major focus of the commodity risk strategy in the purchasing department is based on figure 9 to: Save cost Limit commodity price increases Beat the commodity market The focus area in the purchasing risk strategy is much more aggressive than that of the company wide risk strategy, and we see a need to align focus on whether companies want to beat the commodity market or have accurate and predictable financial figures. Figure 10 shows that commodity risk is primarily handled in the purchasing department and 41% of respondents work cross-functionally with commodity risk management. Based on figure 10 it is found that 69% of the respondents have commodity risk management coordinated in the purchasing department: Making cost savings on commodity purchasing 2. Monitoring the market and trying to limit commodity price increases for a period until price increases can be passed on to the customers 3. Trying to achieve better results than offered by the spot market 4. Monitoring the market and trying to limit commodity price increases in the budget period to ensure that the budget is kept 5. Ensuring that the purchasing department undertakes the risks according to the company s risk management strategy To a very high degree To a low degree To a high degree Not at all To some degree Don t know Figure 9. To which degree does the aim of the purchasing department s own risk management strategy incorporate the following? 52% is handled at a department level 25% is individually handled by the category manager The 25% is considered too high a number. The individual can take actions that he/she finds necessary to reduce risk on the specific commodity without considering how this will affect the risk of the whole department or company. An individual s action to hedge risk could lead to an increased overall risk for the depart Coordinated by purchasing department The risk management is made individually by the relevant purchaser/category manager The finance department The top management Cross-orgisational risk committee Figure 10. Who manages the commodity price risk management in your company? The accounting department The risk management is made in a decentralised manner in departments or in factories The risk management department Strategic commodity risk management survey 2011 All rights reserved 13

14 3. Risk management direction setting The finance department The purchasing department The accounting department The top management Figure 11. Who manages the currency risk management in your company? The risk management department The risk management is made individually by the relevant purchaser/category manager The risk management is made in a decentralised manner in departments or in factories Cross-organisational risk committee Number of employees Less than 50 million million million million 600-1,000 million 1,000-10,000 million Annual spend ( ) Figure 12. Average number of employees in the purchasing department working with sourcing, analyses etc., compared to annual spend More than10,000 million ment if it is not handled and coordinated at a department level. Moreover, 2 of the respondents have the financial department managing the commodity risk and further analysis shows that 41% has commodity risk management shared between several departments. The currency risk is, however found to be primarily handled by the finance department and 34% of respondents work cross-functionally with currency risk management. This is found in Figure % of the respondents have the finance department managing currency risk, whereas 24% of the respondents have purchasing managing currency risk. Further analysis shows that 34% of the respondents share currency risk management between several departments The results from the above figures are that: Commodity risks are managed in purchasing Currency risks are managed in finance It is of great importance that the commodity risk and currency risk are better coordinated at a corporate level as the development in the commodity markets are closely linked to the development in the currency markets. Therefore, to create a corporate level view of the overall risk management of the company, there is a need to use both commodity and currency data. The previous strategy analysis shows increasing tasks for the purchasing department, however, the purchasing department seems understaffed which is depicted in figure 12. From figure 12 it is found that the spend handled by employees for sourcing, analysis, etc. in the purchasing department: 14 Strategic commodity risk management survey 2011 All rights reserved

15 The online Commodity Risk Portal Commodity Market Analyses including Price Trend Forecasts VaR - Risk Management Engine Supplier Input Cost Tracker Training and Consultancy Customer references

16 3. Risk management direction setting Direct Packaging Logistics Energy Capital costs Personnel IT and telecommunication CAPEX Marketing MRO Professional services Facility Figure 13. For the following categories, state your insight into what drives the suppliers expenses (the cost drivers of the suppliers) Average 168 m is handled by one FTE Low is 1.25 m handled by one FTE High is 529 m handled by one FTE Potential exists because respondents have limited understanding of cost drivers behind major categories which is the conclusion from figure 13. The respondents insights to the cost drivers of the suppliers are focused on: Direct spend Packaging Logistics Energy Fact based negotiation Change of risk exposure Making an overview of risk exposure Figure 14. What is this knowledge applied to? Input to a future contract strategy Respondents have limited insights into other categories which account for 44% of total spend. And among those companies with poor or no insight it equals more than 45 bn. Therefore, further cost driver understanding is believed to realise significant potentials. Further potential exist as figure 14 shows that when respondents have knowledge about category cost drivers only 53% use it for fact based negotiations and only 19% use it to change current risk exposure! From figure 14 it is found than knowledge about category cost drivers is used for: Fact based negotiations (53%) Change of risk exposure (19%) Making an overview of risk exposure (53%) Input to a future contract strategy (57%) It seems that cost driver information is often used for analysis (making an overview of risk exposure and input to a future contract strategy). This suggests that vital information more often is used for value creating activities (e.g. limit risks or reduce costs). 16 Strategic commodity risk management survey 2011 All rights reserved

17 Risk analyses 4

18 4. Risk analyses There seems to be a classic focus on supply, supplier and commodity risks. Currency and energy risks are surprisingly not in focus which is illustrated in figure 15. The focuses for procurement risk are found to be the classic and expected ones: Supply risks 79% of respondents Supplier risks 79% of respondents Commodity risks 7 of respondents Currency and energy risks are considered high on probability and impact. However, only half of the respondents focus on these risks. From figure 16, there is good correlation between estimated impact/probability and focus. The immediate conclusion to the results shown in figure 15 is that companies are found to do the right thing. Considering the significant link between many categories and commodity fluctuation, respondents have a surprisingly limited focus on managing commodity risks, even on key categories which is found from figure 16. The questions concerning the companies spend are divided into the following categories: CAPEX (machines, buildings, etc.) Direct (steel-, plastics-, electronic-based spend, etc.) Packaging (metal-, glass-, paper based spend, etc.) Energy (oil, gas, electricity, etc.) Facility (cleaning, Insurance, etc.) IT & telecommunication (software, hardware, telecommunication, etc.) Capital costs (creditors, debitors) How much negative influence do you estimate the following risk types might have on your company? 4 3,5 3 2,5 2 1,5 1 0,5 Fraud 18% Compliance 4 Organisational risks 15% Geopolitical risks 19% Outsourcing 39% Supplier risks 79% Market risks 37% Energy price risk 46% Currency risks 55% Supply risks 79% Commodity price risks ,5 1 1,5 2 2,5 3 3,5 With which probability do you estimate the occurrence of the following risk types? Figure 15. Which procurement risks do you concentrate on in your risk management work? 18 Strategic commodity risk management survey 2011 All rights reserved

19 4. Risk analyses To which degree do you estimate that the commodity exposure of the following categories may have a negative influence on your company? 4 3,5 3 2,5 2 1,5 1 0,5 Facility 11% Personnel 12% Professional services 5% Marketing 3% IT and telecommunication 14% MRO 17% CAPEX 13% Capital costs 17% Packaging 32% Logistics 32% Energy 49% Direct 75% 0 0 0,5 1 1,5 2 2,5 3 3,5 How will you estimate the probability of considerable volatility in commodity prices, either directly or inderectly (e.g. as a cost driver), in the following categories? Figure 16. In which of the following categories do you work actively with risk management with the purpose of managing the commodity exposure, such as identification, evaluation, response, etc.? Logistics (transport, warehouse, etc.) Marketing (printing, commercials, market-research, etc.) MRO (maintenance, spare parts, indirect materials, etc.) Personnel (recruitment, training, clothing, etc.) Professional services (audit, consulting, travel, etc.) Figure 16 shows that direct, energy, logistics and packaging are considered the most risky spend-categories. 75% of the respondent companies work actively with managing their risk management in direct purchasing. However, only 49% of the companies work actively with risk management in their energy purchasing despite the fact that this category is considered to be one of the most risky. 32% of the companies work actively with managing their logistics and packaging risk, which also are considered to be categories connected with the highest risk. Thus, the greater majority of the companies has and is considering that these important and risky categories can have a significant effect on the bottom line and that there is a great probability of heavy fluctuations in the commodities markets. However they have not yet begun working actively with managing their risk. Among the other spend-categories less than 1/5 of the respondent companies do not work actively with risk management. The category focus for active risk management is: Figure 17. Is your company s exposure in the commodity market quantified, e.g. so that the company knows the bottom line effect of price fluctuation in essential commodities? % 16% 16% 38% 34% 36% 5 5 Don t know No Yes 49% Direct 75% of respondents Energy 49% of respondents Logistics and packaging 32% of respondents 2 Don t know No Yes Though energy is a major category, more than 5 does not focus on managing commodity risk on energy. Also logistics and packaging focus seem too low Figure 18. Has your company made a systematic analysis of the size of your expenditures that either directly or indirectly (through cost drivers) can be attributed to commodities? Strategic commodity risk management survey 2011 All rights reserved 19

20 4. Risk analyses Regularly Monthly Quarterly Yearly Less often Figure 19. How often is this analysis updated? considering the huge commodity dependency. Figure 17 shows that the bottom line consequences of fluctuations in the commodity markets are only quantified in 5 of the respondent companies. 5 of the companies have quantified their exposure of fluctuations in the commodity markets and their impact on the bottom line the other half has done nothing Further analysis shows that an amount of more than 93 bn is the amount of spend not accounted for. The impact on the bottom line of a 1 decrease or increase in commodities is therefore unknown. Note that those who have not quantified commodity risks are both small, medium and large size companies Figure 18 shows that more than 3 of the respondent companies have not made and does not make systematic cost driver analysis. Further, more than 4 make the update on the break-down on a yearly basis or even more rarely. Considering the volatility in the commodity markets this update frequency seems too seldom as this indicates that behaviour is based on old figures and not fact based. Don t know No Yes, but only for the most essential commodities Yes, for all commodities included in the spend Figure 19 and Figure 20 show that there is only sporadic analysis and low update frequency of the size of spend that can be attributed to commodities: Figure 20. Does your company use forecast of commodity prices based on structured analyses of the market development? Forecasting commodity prices are widely used and seem surprisingly to be based on structured analysis, which figure 20 and figure 21 show of the respondents consider structured commodity forecasts on market development, which is considered very positive. Figure 21 shows that these commodity price forecasts are primarily based on: Fundamental analysis Macroeconomic analysis We find it positive that indexation and projections based on current prices are not found widely used. 2 1 Fundamental analysis Technical analysis Analysis of economic developments Projection based on the basis of index Projection based on fixed inflation rate Figure 21. On which basis are the commodity price forecasts made? 20 Strategic commodity risk management survey 2011 All rights reserved

21 Risk actions 5

22 5. Risk actions Figure 22 shows that tools for risk mitigation actions are primarily fixed price and indexed contracts with suppliers. Risk mitigation actions are primarily fixed price and indexed contracts with suppliers. Further, more than 4 of the larger respondent companies hedge via financial markets - smaller companies rarely hedge via financial markets. 24% hedges by building inventory Fixed-price contracts with suppliers Indexed contracts with suppliers Hedging via financial markets Physical hedging (e.g. by constructing warehouses) Figure 22. Which of the following tools are applied to act against the risk of commodity price changes? To our surprise figure 23 and figure 24 show that only about 2 of the respondents have procedures defined for hedging via financial markets and contractual hedging. 26% has defined procedures for hedging via financial markets, whereas 17% has defined procedures for contractual hedging. companies have a higher proportion of defined procedures for hedging, but the majority of the companies do not have any procedures for execution of hedging or do not know whether they have one Don t know No Yes Figure 23. Has your company defined procedures for the execution of hedging via financial markets? Don t know No Yes Figure 24. Has your company defined procedures for contractual hedging? 22 Strategic commodity risk management survey 2011 All rights reserved

23 5. Risk actions Taking a closer look at the financial hedging procedures, we see a substantial use of several levers, which is seen in figure The procedures for hedging via financial markets cover: Limitation of the minimal part of spend that should be hedged Limitation of the maximal part of spend that can be hedged Maximum time frame Applicable financial instruments (options, warrant, futures, forwards, etc.) Primarily smaller companies limit the minimal amount of spend that should be hedged. This is probably due to the fact that they cannot carry the risk themselves. The majority of customer and supplier contracts have a balanced structure when it comes to commodity risks. However, based on the levels of coordination and analysis it seems to be pure luck as illustrated in figure Limitation of the minimal part of spend that should be hedged Limited of the maximum part of spend that can be hedged Maximum time frame Applicable financial instruments Figure 25. Are the following points defined in the procedure for hedging via financial markets? The majority of those companies who primarily have fixed price agreements with customers also have fixed price agreements with suppliers. Thus the contract structure is well-balanced and hence a limited risk. 21% does not have a balanced contract structure and is therefore significantly exposed to commodity risks. From figure 27, companies are found to use cost drivers index for index-based price agreements, which is the right thing to do. It is great to find that companies primarily use price indices for cost drivers in index-based prices agreements. It is often seen that consumer price indices are used (however, not in this survey). The reason not to use consumer price index is that they do not correspond to actual price developments or at best they change too late. Which type of contract does your company mainly make with its customers in order to wholly or partially pass on the commodity price risk to the customers? Figure Which type of contract does your company mainly make with its suppliers in order to wholly or partially pass on the commodity price risk to the suppliers? Contracts with indexbased price agreements Long-term fixed price contracts Contracts with indexbased price agreements Long-term fixed price contracts 38% 14% 7% 41% Consumer price index (e.g. from national statistics agencies) Price index for cost driver (e.g. metal prices from commodity exchanges) Figure 27. What type of index is mainly the basis for the indexbased price agreements with suppliers? Strategic commodity risk management survey 2011 All rights reserved 23

24 5. Risk actions 6 5 Less than 25% 25%-5 More than 5 Turning to direct spend, renegotiation is found from figure 29 to take place with fixed frequency and is not based on commodity analysis Figure 28. When are contracts renegotiated within each of the following categories? Direct compared to direct s share of total spend Don t know In regular intervals depending on the duration of the deal (e.g. by expiry of contract or yearly) Don t know In regular intervals depending on the duration of the deal (e.g. by expiry of contract or yearly) When external events make it necessary When the purchasing department has resources When external events make it necessary When the purchasing department has resources When sourcing initiatives are launched On the basis of analysis of commodity price development When sourcing initiatives are launched Less than 5% 5%-9.9% 1-15% More than 15% On the basis of analysis of commodity price development Figure 29. When are contracts renegotiated within each of the following categories? Energy compared to energy s share of total spend 5 of the respondent companies renegotiate their direct spend categories at regular intervals pending on the supplier agreement. We recommend that renegotiation is based on commodity market analysis, however only 24% is found to use this method from figure 28! Moreover, the size of direct spend relative to total spend does not seem to influence the renegotiation timing The same tendency goes for energy spend. Figure 29 shows that renegotiation is taking place with fixed frequency and is not based on a commodity analysis. 46% of the respondent companies renegotiate their energy spend categories at regular intervals pending the supplier agreement. We recommend that renegotiation is based on commodity analysis, however only 22% is found to use this method on energy costs based in figure 29. The size of energy spend relative to total spend seems to call for more correct handling of energy spend that is renegotiation based on analysis. Further analysis shows the same tendency on all spend categories (as seen on direct and energy spend). The most valuable effort in category management at portfolio-level is the ability to source the different categories under the most favourable market conditions. The price level differences in commodity markets and commodity driven markets often make out a difference in the area of price difference not even the world s best sourcing process can make this kind of impact on your spend. Timing in the specific category as well as timing at portfolio level combined with the appropriate contract strategy is what makes the difference. It goes without saying that if the expiry date is the prime tricker for entering the market, paramount opportunities are missed. 24 Strategic commodity risk management survey 2011 All rights reserved

25 Supporting methods, tools and systems 6

26 6. Supporting methods, tools and systems Finance and sales only participate in meetings regarding commodity prices in about 25% of the respondent companies which is found from figure Don t know No Yes From figure 31, only 55% of the respondent companies are found to arrange cross-functional meetings about commodity price risk. At those meetings purchasing department and top management are most often the participants. This is seen in figure 31. Figure 30. Does your company hold cross-organisational meetings between the person responsible for commodity price risk management and other relevant departments, e.g. the sales department, the purchasing department and the finance department? The purchasing department The finance department The accounting department The sales department The top management Figure 31. Who attend these cross-organisational meetings about commodity price risk management? It is found alarming that finance and sales only participate in respectively 5 and 39% of the meetings that are actually held regarding commodity prices risk. Suppliers and research institutes are the major providers of commodity price forecasts for the respondent companies. This is seen in figure 32. The results from the questionnaire in figure 32 are: 78% gets commodity price forecasts from research suppliers this is quite understandable but not good as suppliers interests can conflict with the interests of the company. 69% gets commodity price forecasts from research institutes this is a positive signal as research institutes are often the most objective sources available, which reduces the risk of receiving biased information regarding price forecasts % gets commodity price forecasts from news media The information from news media is often fragmented and event driven tending to focus too much on individual and often random events % gets commodity price forecasts from banks one should be careful about using price forecasts from banks, as bank are not always completely objective and have their own interest and positions in the market Suppliers Research institutes News media Banks Customers 24% gets commodity price forecasts from customers Customers seldom have the big picture of what s going on 2-3 levels further upstream in the supply chain there are exceptions but they are rare. Figure 32. From which source do you get the externally made commodity price forecasts? 26 Strategic commodity risk management survey 2011 All rights reserved

27 The way forward for 7 commodity risk management

28 7. The way forward for commodity risk management Don t know Figure 33. Does the purchasing department plan to make its own risk management strategy? No Yes Commodity risk management is extremely critical to business success, however, apart from a limited elite group, there are only limited efforts to focus on the area in the companies questioned and analysed in this survey. Over the last 5-6 years we have seen abnormal commodity price fluctuations and it seems as this tendency is increasing if we evaluate the current market situation. This survey shows that the task of managing commodity risk lies with purchasing. This survey also shows that 45% of purchasing departments do not have a commodity risk strategy. Therefore we find it disturbing that 46% of those companies who do not have a commodity risk management strategy do not intend to develop one. This is shown in figure 33. Volatility is high. However, the main survey conclusion is that commodity riskmanagement is hot in the leading companies, but there are a larger proportion of the companies that have not had the wake-up call yet. It is timely for the top management team to review how the company can develop a more disciplined and skilled approach to price risk. Where to start depends on your current position here are our recommendations: 1. Laggard steps to success Immediately begin to collaborate with finance and top management on building the business case of risk management and establish a baseline for your current risk exposure within commodities and currencies based on the VaR value at risk methodology. Immediately begin to collaborate with finance and top management on building the business case of risk management and establish a baseline for your current risk exposure within commodities and currencies based on the VaR value at risk methodology. Establish a baseline of your past (last decade) and current performance against the market - this will give you valuable input to the ROI calculation of the business case. Develop a plan sponsored and funded by top management to close the gap. The plan should include: Quantitative risk measurements based on VaR desired risk profile based on risk capacity and risk appetite Risk mitigation strategies including risk responses Governance, procedures, processes and policies Reporting, controlling and compliance procedures Automated off limit monitoring and alert system 2. Industry average steps to success Immediately begin to collaborate with finance and start measuring (and reporting) regularly on commodity and currency risks at category and portfolio level Start to quantify risk based on VaR value 28 Strategic commodity risk management survey 2011 All rights reserved

29 Business Critical 5 High 4 3 Low 2 Not Relevant 1 Business Critical 5 High 4 3 Low 2 Not Relevant 1 Business Critical 5 High 4 3 Low 2 Not Relevant Business Critical 1 5 High 4 3 Low 2 Not Relevant BASIC 2 3 DEVELOPING 4 5 PROFESSIONAL 6 7 ADVANCED Current Competency level Required Competency level Competency Gap Current Competency level Required Competency level Competency Gap 8 9 EXPERT 10 Current Competency level Required Competency level Competency Gap Current Competency level Required Competency level Competency Gap Provides specific performance Deals firmly and promptly with Support employees in their efforts Sets employees performance feedback, both positive and performance problems; lets to achieve job goals by providing Sets personal measurable goals standards that are specific and corrective, as soon as possible people know what is expected of resources, removing obstacles. that are realistic but challenging 1 measurable. Helps them get the after an event. Prepares 7 a them and 8 when. Takes significant Seeks performance feedback with dates for accomplishment. information and resources to personal development plan with action to develop skills needed for from manager and from others accomplish the work effectively. specific goals and a timeline for effective managing performance 1 BASIC 2 3 DEVELOPING whom he/she 4interacts 5 on the PROFESSIONAL job. their accomplishment. 6 7 ADVANCED in current 8 or future 9 job. EXPERT 10 Copyright Future Purchasing Positions & DILF, detailed 2008 spend category Identifies and takes into Produces price history profiles that result in stakeholder consideration demand level Produces structured breakdowns breakdowns at a sub-category understanding and full support for Support the development of the factors. Analyses forecast 1 of historic category spend and and business level. Identifies key 7 the category 8 sourcing initiatives. category spend profile. demand at sub-category and volumes. price drivers Implements solutions to automate business levels to create insight date gathering and ongoing spend 1 BASIC 2 3 DEVELOPING 4 5 PROFESSIONAL and 6opportunity. 7 ADVANCED 8 profiling 9 EXPERT 10 1 Copyright Identifies and takes into 7 Future Purchasing Positions & DILF, 8 detailed 2009 spend category Produces price history profiles that result in stakeholder consideration demand level Produces structured breakdowns breakdowns at a sub-category understanding and full support for Support the development of the factors. Analyses forecast 1 BASICof historic category 2 3 spend DEVELOPING and and business 4level. 5 Identifies PROFESSIONAL key 6 7 ADVANCED the category 8 sourcing 9 initiatives. EXPERT 10 category spend profile. demand at sub-category and volumes. price drivers Implements solutions business levels to create Positions to automate detailed spend category Identifies insight and takes into Produces price history date gathering and and opportunity. profiles ongoing that spend result in stakeholder consideration demand level Produces structured breakdowns breakdowns at a sub-category profiling understanding and full support for Support the development of the factors. Analyses forecast of historic category spend and and business level. Identifies key Copyright Future Purchasing the category & DILF, 2009 sourcing initiatives. category spend profile. demand at sub-category and volumes. price drivers Implements solutions to automate business levels to create insight date gathering and ongoing spend and opportunity. profiling Copyright Future Purchasing & DILF, 2009 Business Critical 5 High 4 3 Low 2 Not Relevant 1 Business Critical 5 High 4 3 Low 2 Not Relevant 1 Business Critical 5 High 4 3 Low 2 Not Relevant Business Critical 1 5 High 4 3 Low 2 Not Relevant BASIC 2 3 DEVELOPING 4 5 PROFESSIONAL 6 7 ADVANCED Current Competency level Required Competency level Competency Gap Current Competency level Required Competency level Competency Gap 8 9 EXPERT 10 Current Competency level Required Competency level Positions detailed spend category Identifies and takes into Produces price history profiles that result in stakeholder consideration demand level Produces structured breakdowns breakdowns at a sub-category understanding and full support for Support the development of the factors. Analyses forecast category spend profile. 1 of historic category spend and and business level. Identifies key 7 the category 8 sourcing initiatives. demand at sub-category and volumes. price drivers Implements solutions to automate business levels to create insight date gathering and ongoing spend and opportunity. 1 BASIC 2 3 DEVELOPING 4 5 PROFESSIONAL 6 7 ADVANCED profiling 8 9 EXPERT 10 Competency Gap Current Competency level Required Competency level Competency Gap Copyright Future Purchasing Positions & DILF, detailed 2009 spend category Identifies and takes into Produces price history profiles that result in stakeholder consideration demand level Produces structured breakdowns breakdowns at a sub-category understanding and full support for Support the development of the factors. Analyses forecast 1 of historic category spend and and business level. Identifies key 7 the category 8 sourcing initiatives. category spend profile. demand at sub-category and volumes. price drivers Implements solutions to automate business levels to create insight date gathering and ongoing spend 1 BASIC 2 3 DEVELOPING 4 5 PROFESSIONAL and 6opportunity. 7 ADVANCED 8 profiling 9 EXPERT 10 1 Copyright 7 Future Purchasing Positions & DILF, 8 detailed 2009 spend category Identifies and takes into Produces price history profiles that result in stakeholder consideration demand level Produces structured breakdowns breakdowns at a sub-category understanding and full support for Support the development of the factors. Analyses forecast 1 BASICof historic category 2 3 spend DEVELOPING and and business 4level. 5 Identifies PROFESSIONAL key 6 7 ADVANCED the category 8 sourcing 9 initiatives. EXPERT 10 category spend profile. demand at sub-category and volumes. price drivers Implements solutions business levels to create Positions to automate detailed spend category Identifies insight and takes into Produces price history date gathering and and opportunity. profiles ongoing that spend result in stakeholder consideration demand level Produces structured breakdowns breakdowns at a sub-category profiling understanding and full support for Support the development of the factors. Analyses forecast of historic category spend and and business level. Identifies key Copyright Future Purchasing the category & DILF, 2009 sourcing initiatives. category spend profile. demand at sub-category and volumes. price drivers Implements solutions to automate business levels to create insight date gathering and ongoing spend and opportunity. profiling Copyright Future Purchasing & DILF, 2009 direction matters Compass The web-based comprehensive competence assessment system Compass is a comprehensive competency assessment solution for procurement. Individuals assess their competencies against ideal role profiles, these assessments are compared with managers views, gaps against the ideal profile are identified and prioritised, and personal development plans produced. Each organisation is unique, with its own challenges, structure, objectives, job specification and strategic initiatives. We work with our clients to customise our competency framework to fully match with their specific needs. The on-line competency assessment is carried out through a mixture of self-assessment and interviews. We have worked with leading organisations, & our colleagues in Future Purchasing, to develop a comprehensive assessment tool, Compass, covering both functional and business competencies. On-line competency assessment tool Includes 100 detailed competencies covering functional and business skills Developed specifically for procurement Can be customised for each client and applied at all organizational levels Request more information: info@kairoscommodities.com mail@dilf.dk Compass procurement competency assessment Procurement structure competency assessment structure There is a significant amount of depth to the Future Purchasing competency framework. This structure is built into the Compass tool, but can be modified to suit specific client requirements. 100 Competencies 10 Clusters 2 Generic Analysis & Systems Priority: Definition: Leadership & Mangement Priority: Priority: Organising & Planning COMPETENCY: MANAGING PERFORMANCE COMPETENCY: CATEGORY SPEND PROFILING The ability to manage and improve the performance of individuals and teams. COMPETENCY: Change & Strategy Description: Definition: Priority: COMPETENCY: Taking responsibility for your own and employees performance, by CATEGORY setting clear goals and expectations, SPEND tracking progress PROFILING against the goals, ensuring feedback, and addressing performance problems The ability and to issues segment promptly. and analyse Performance category management spend information is also the to drive process commercial of creating insights. a work environment or setting in which people are enabled to perform to the best of their abilities. CATEGORY SPEND PROFILING Business Competencies Communication & Influencing Key features: Description: Tools, techniques & behavioural indicators: Definition: Clear job descriptions & objectives PDCA-cycles (Plan-Do-Check-Act) Gives regular, Category constructive Spend Profiling feedback creates on performance a segmented profile of the spend, Coaching volumes, & specifications, Feedback price history and contracts for a category of spend. It Guides involves staff understanding gathering detailed operational information priorities fromthe a ability number to of segment sources and including Setting analyse clear spend category and databases, measurable spend information MRP objectives systems, to drive and supplier goals commercial invoices, insights. contracts, budgets Effective andcompensation internal stakeholders. & recognition Summarise systems Definition: and consolidate the information Performance to create summary management chartspolicies coveringand all processes the main areas. Provide promotional/career development opportunities for staff Key features: Description: Tools & techniques: Gather information from a wide range of sources The ability to segment and Spend analyse analysis category spend information to drive commercial insights. Create Category summary Spend graphs Profiling and charts creates a segmented profile of the spend, Invoice volumes, analysis specifications, price history and contracts for a category of spend. It Analyse involves the information gatheringto detailed get commercial information insights from a number of sources including Category spend segmentation databases, MRP systems, supplier invoices, contracts, budgets Add to and the internal profile as stakeholders. more information Description: Summarise available and consolidate the information Contract to createanalysis summary charts covering all the main areas. Create a baseline for ongoing sourcing activities Spreadsheets and summary charts Key features: Category Spend Profiling creates a segmented profile of the Tools spend, & volumes, techniques: specifications, price history and contracts for a category of spend. It Gather involves information gathering from a detailed wide range information of sources from a number of sources including Spend analysis spend databases, MRP systems, supplier invoices, contracts, budgets Create and summary internal graphs stakeholders. and charts Summarise and consolidate the information Invoice to create analysis summary charts covering all the main areas. Analyse the information to get commercial insights Category segmentation Add to the Key profile features: as more information is available Contract Tools analysis & techniques: Create a baseline Gather for ongoing information sourcing from activities a wide range of sources Spreadsheets and Spend summary analysis charts Create summary graphs and charts Invoice analysis Analyse the information to get commercial insights Category segmentation Add to the profile as more information is available Contract analysis Create a baseline for ongoing sourcing activities Spreadsheets and summary charts Level: Level: Level: Level: Personality Profile Functional Competencies Strategic Sourcing Supplier Management Priority: Definition: Priority: Negotiation & Contracting COMPETENCY: CATEGORY SPEND PROFILING COMPETENCY: The ability to segment and analyse category spend information to drive commercial insights. Priority: COMPETENCY: Risk Management CATEGORY SPEND PROFILING Description: Definition: Priority: COMPETENCY: Category Spend Profiling creates a segmented profile of the spend, CATEGORY volumes, specifications, price SPEND history and contracts PROFILING for a category of spend. It involves gathering detailed information fromthe a number ability to of segment sourcesand including analyse spend category databases, spend information MRP systems, to drive supplier commercial invoices, insights. contracts, budgets and internal stakeholders. Summarise and consolidate the information to create summary charts covering all the main areas. CATEGORY SPEND PROFILING Cost & Value Management Key features: Tools & techniques: Description: Gather information from a wide Definition: range of sources Spend analysis Create Category summary Spend graphs Profiling and charts creates a segmented profile of the spend, Invoice volumes, analysis specifications, price history and contracts for a category of spend. It Analyse involves the information gathering to detailed get commercial information insights fromthe a ability number to of segment sources and including Category analyse spend segmentation category databases, spend information MRP systems, to drive supplier commercial invoices, insights. contracts, budgets Add to and the profile internal as stakeholders. more information Summarise available Definition: and consolidate the information Contract to create analysis summary charts covering all the main areas. Create a baseline for ongoing sourcing activities Spreadsheets and summary charts Key features: Description: Tools & techniques: Gather information from a wide range of sources The ability to segment and Spend analyse analysis category spend information to drive commercial insights. Create Category summary Spend graphs Profiling and charts creates a segmented profile of the spend, Invoice volumes, analysis specifications, price history and contracts for a category of spend. It Analyse involves the information gatheringto detailed get commercial information insights from a number of sources including Category spend segmentation databases, MRP systems, supplier invoices, contracts, budgets Add to and the internal profile as stakeholders. more information Description: Summarise available and consolidate the information Contract to createanalysis summary charts covering all the main areas. Create a baseline for ongoing sourcing activities Spreadsheets and summary charts Key features: Category Spend Profiling creates a segmented profile of the Tools spend, & volumes, techniques: specifications, price history and contracts for a category of spend. It Gather involves information gathering from a detailed wide range information of sources from a number of sources including Spend analysis spend databases, MRP systems, supplier invoices, contracts, budgets Create and summary internal graphs stakeholders. and charts Summarise and consolidate the information Invoice to create analysis summary charts covering all the main areas. Analyse the information to get commercial insights Category segmentation Add to the Key profile features: as more information is available Contract Tools analysis & techniques: Create a baseline Gather for ongoing information sourcing from activities a wide range of sources Spreadsheets and Spend summary analysis charts Create summary graphs and charts Invoice analysis Analyse the information to get commercial insights Category segmentation Add to the profile as more information is available Contract analysis Create a baseline for ongoing sourcing activities Spreadsheets and summary charts Level: Level: Level: Level: