risk management in procurement – new challenges or new ... · commodity risk management is...
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Valcon · Kairos Commodities · Aarhus School of Business · Danish Purchasing- and Logistics Forum
Strategic commodity risk management survey © 2011 All rights reserved 1
Risk management in procurement – new challenges or new opportunities?
Strategic commodity risk management survey 2010-2011
Valcon · Kairos Commodities · Aarhus School of Business · Danish Purchasing- and Logistics Forum
Strategic commodity risk management survey © 2011 All rights reserved
Valcon · Kairos Commodities · Aarhus School of Business · Danish Purchasing- and Logistics Forum
Strategic commodity risk management survey © 2011 All rights reserved 3
Contents
1. Survey background ................................................................................ 4
2. Survey demography and reference model .................................................. 7
3. Risk management direction setting .......................................................... 11
4. Risk analyses ....................................................................................... 17
5. Risk actions ......................................................................................... 21
6. Supporting methods, tools and systems ................................................... 25
7. The way forward for commodity risk management ..................................... 27
Valcon · Kairos Commodities · Aarhus School of Business · Danish Purchasing- and Logistics Forum
4 Strategic commodity risk management survey © 2011 All rights reserved
Valcon · Kairos Commodities · Aarhus School of Business · Danish Purchasing- and Logistics Forum
Strategic commodity risk management survey © 2011 All rights reserved
Survey background 1
1. Survey background
Valcon · Kairos Commodities · Aarhus School of Business · Danish Purchasing- and Logistics Forum
Strategic commodity risk management survey © 2011 All rights reserved 5
This survey was conducted in 2010/2011 with 169 respondents. The survey is a collaboration between:
Kairos Commoditieswww.kairoscommodities.comVesterbrogade 149, DK-1620 Copenhagen VTel: +45 3025 [email protected]
Danish Purchasing and Logistics Forum (DILF)www.dilf.dkVesterbrogade 149, DK-1620 Copenhagen VTel: +45 3321 [email protected]
Valconwww.valcon.dkChristianshusvej 187, DK-2970 HørsholmTel: +45 4580 [email protected]
Aarhus School of Businesswww.asb.dkFuglesangs Allé 4, DK-8210 Aarhus VTel: +45 8948 [email protected]
The research team
Lasse Hvid-Jørgensen, Kairos CommoditiesAnders Aagesen, Kairos CommoditiesSøren Vammen, Kairos CommoditiesStig Jessen, ValconTorben Tæstesen, Valcon,Morten Munkgaard Møller, Aarhus School of Business/DILFJon 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 ItalyAERCE in SpainBMÖ in AustriaCentrale Paris – Achats & Supply Chain in FranceDILF in DenmarkNIMA in NorwayHALPIM in HungaryNEVI in the NetherlandsSILF in SwedenZNS in SloveniaÖPVZ in Austria
Valcon · Kairos Commodities · Aarhus School of Business · Danish Purchasing- and Logistics Forum
6 Strategic commodity risk management survey © 2011 All rights reserved
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 $110-120 per barrel; the UN Food & Agriculture Organisation’s Food Commodity Price In-dex 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 slow-ing 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 im-portance.
The aim of the survey is to uncover current practice within strategic commodity risk management in Eu-ropean companies. We all know there is a big differ-ence between companies procurement maturity levels – this survey shows that the differences within strate-gic commodity risk management are extreme.
Key findings
1. 45% of companies have no commodity risk strat-egy in purchasing on how to address their total spend.
2. Risk management is characterised by sub-optimi-sation – 69% have commodity risk co-ordinated by purchasing and 65% currency risk by finance. Only approximately 30% have an integrated approach.
3. Only on 56% of the spend there is a deep under-standing of cost drivers behind major categories.
4. 50% of the respondents have a strategy for deal-ing with risk on energy – 50% have no strategy.
5. 50% of the companies do quantify the bottom line effect of price fluctuation on essential commodi-ties. 50% of companies do not do this. 30% have no systematic cost driver analysis and 40% only do it yearly, or less frequently.
6. 70% of the respondents don’t have defined proce-dures for execution of hedging via financial mar-kets.
7. Renegotiation is taking place with fixed frequency
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 devel-oping 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 recom-mendations on page 28-31.
Survey demography and reference model 2
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8 Strategic commodity risk management survey © 2011 All rights reserved
2. Survey demography and reference model
The distribution of the size of the respondent compa-nies is shown in figure 1. The company-size is divided into three groups: 35% small, 40% medium-sized and 25% large companies.
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 origi-nate 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 pri-marily manufacturing companies – which are shown in figure 3.
Figure 1. Respondents’ turnover
Less
than
10 milli
on Eur
o
10-2
0 milli
on Eur
o
20-3
0 milli
on Eur
o
30-5
0 milli
on Eur
o
50-1
00 m
illion
Eur
o
100-
200 milli
on Eur
o
200-
400 milli
on Eur
o
400-
600 milli
on Eur
o
600-
800 milli
on Eur
o
800-
1,00
0 milli
on Eur
o
1,00
0-1,
500 milli
on Eur
o
1,50
0-2,
000 milli
on Eur
o
2,00
0-2,
500 milli
on Eur
o
2,50
0-3,
000 milli
on Eur
o
3,00
0-4,
000 milli
on Eur
o
4,00
0-5,
000 milli
on Eur
o
5,00
0-6,
000 milli
on Eur
o
6,00
0-7,
000 milli
on Eur
o
8,00
0-10
,000
milli
on Eur
o
More th
an 10,
000 milli
on Eur
o
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
Small: 35% Medium: 40% Large: 25%
Figure 2. Respondent origin distribution
Denmark 27%Netherlands 24%Austria 16%France 10%Italy 5%Spain 5%Norway 3%Slovenia 2%Other 8%
Figure 3 . Respondent industry distribution
Construction company 20%Manufacturing company 68%Pharmaceutical company 5%Whole sale trading and retailing 4%Other 3%
i
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.
Management Consultants
Read more:www.valcon.dk
A4 profilannonce til Dilf-Valcon risk survey_v2_marts 2011.indd 1 28-03-2011 11:06:01
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10 Strategic commodity risk management survey © 2011 All rights reserved
2. Survey demography and reference model
Figure 4. How do you distribute your spend between the fol-lowing categories (percentage)?
Direct 35%Energy 9%Personnel 8%Logistics 7%Capital costs 7%CAPEX 7%MRO 6%Packaging 5%IT and telecommuni-cations 5%Facility 4%Marketing 4%Professinal services 3%
Figure 4 shows that a 40/60 ratio between direct and non-direct spend is the profile among most respond-ents.
From figure 4 it can be concluded that, Direct (BOM goods) covers 40% of spend and indirect categories cover 60% 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
This commodity risk survey is built around our refer-ence model, which covers key dimensions of commod-ity risk management within purchasing. This reference model is depicted in figure 5.
Figure 5. Reference model. Source: © Valcon/Kairos Commodities A/S (all rights reserved)
Market and corporate input Risk transparency Risk management
Risk analysis
Risk identification
Risk assessment
Risk mitigation
Risk action plans
Follow-up activities
Risk management direction setting:Risk strategy and risk value proposition, risk organisation, risk measurement, risk competence development and training
Supporting methods, tools and systems
Organisational alignment, especially sales and finance
Market and corporate strategy
Category mgmt. integration
An
aly
sis A
ction
Risk management direction setting 3
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12 Strategic commodity risk management survey © 2011 All rights reserved
3. Risk management direction setting
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.
Figure 6 shows that an average of 38% of the re-spondents has developed a risk strategy, and that the larger corporations are further developed in this field than the small and medium size corporations.
Further, figure 7 shows that an average of 55% of the respondents has a commodity risk strategy in the pur-chasing department and that all three groups show roughly equal responses to this question.
From figure 6 and 7 it can be concluded that 31% 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-modity risk strategy in purchasing on how to address their total spend of more than €80 bn, which is de-picted in the red box in figure 7.
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 manage-ment 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.
Figure 6. Does your company have a strategy for risk manage-ment that covers risks of the whole company (including supply risks, market risks, organisational risks, etc.)?
60%
50%
40%
30%
20%
10%
0%
LargeMediumSmall
Don’t know YesNo
Avg. 38%
Figure 7. Does the purchasing department have its own risk management strategy covering commodity risk management?
70%
60%
50%
40%
30%
20%
10%
0%Don’t know YesNo
Avg. 55%LargeMediumSmall
45% of respondents
Figure 8. To which degree do the following statements reflect the aim of the company’s risk management strategy?
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Minim
izing
budg
et dev
iatio
ns
Elim
inating ris
ks
Minim
izing
the ris
k
related co
sts
Redu
cing th
e pr
obab
ility
of th
e co
mpa
ny going
bank
rupt
Secu
ring th
at th
e
compa
ny acc
epts th
e ris
ks
acco
rding to
the stra
tegy
Secu
ring stab
ility
in in
come
Increa
sing th
e pr
obab
ility
of th
e co
mpa
ny re
aching
its stra
tegic go
als
Crea
ting ov
erview
of ri
sk exp
osur
e
To a very high degree Not at all Don’t knowTo a low degreeTo some degreeTo a high degree
Valcon · Kairos Commodities · Aarhus School of Business · Danish Purchasing- and Logistics Forum
Strategic commodity risk management survey © 2011 All rights reserved 13
3. Risk management direction setting
Figure 9 however shows that the purchasing depart-ment 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 re-spondents have commodity risk management coordi-nated in the purchasing department:
• 52% is handled at a department level• 25% is individually handled by the category man-
ager
The 25% is considered too high a number. The indi-vidual can take actions that he/she finds necessary to reduce risk on the specific commodity without consid-ering how this will affect the risk of the whole depart-ment or company. An individual’s action to hedge risk could lead to an increased overall risk for the depart-
Figure 9. To which degree does the aim of the purchasing department’s own risk management strategy incorporate the following?
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
To a very high degree
Not at all Don’t knowTo a low degree
To some degreeTo a high degree
1. Making cost savings on commodity purchasing2. Monitoring the market and trying to limit commodity price increases for a period until price increases can be passed on to the customers3. Trying to achieve better results than offered by the spot market4. Monitoring the market and trying to limit commodity price increases in the budget period to ensure that the budget is kept5. Ensuring that the purchasing department undertakes the risks according to the company’s risk management strategy
1. 2. 3. 4. 5.
Figure 10. Who manages the commodity price risk management in your company?
60%
50%
40%
30%
20%
10%
0%
Coor
dina
ted by
purcha
sing de
partm
ent
LargeMediumSmall
The ris
k man
agem
ent i
s mad
e
individu
ally by th
e re
leva
nt
purcha
ser/ca
tego
ry m
anag
er
The fin
ance
dep
artm
ent
The to
p man
agem
ent
Cros
s-or
gisa
tiona
l risk
com
mitt
ee
The ac
coun
ting de
partm
ent
The ris
k man
agem
ent i
s mad
e in
a de
cent
ralis
ed m
anne
r in
depa
rtmen
ts or i
n factor
ies
The ris
k man
agem
ent
depa
rtmen
t
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3. Risk management direction setting
Figure 11. Who manages the currency risk management in your company?
80%
70%
60%
50%
40%
30%
20%
10%
0%
The fin
ance
depa
rtmen
t
LargeMediumSmall
The pu
rcha
sing
depa
rtmen
t
The ac
coun
ting
depa
rtmen
t
The to
p man
agem
ent
Cros
s-or
ganisa
tiona
l
risk co
mmitt
ee
The ris
k man
agem
ent i
s mad
e in
a de
cent
ralis
ed m
anne
r in
depa
rtmen
ts or i
n factor
ies
The ris
k man
agem
ent
depa
rtmen
t
The ris
k man
agem
ent i
s mad
e
individu
ally by th
e re
leva
nt
purcha
ser/ca
tego
ry m
anag
er
ment if it is not handled and coordinated at a depart-ment level.
Moreover, 20% of the respondents have the financial department managing the commodity risk and further analysis shows that 41% has commodity risk manage-ment shared between several departments.
The currency risk is, however found to be primarily handled by the finance department and 34% of re-spondents work cross-functionally with currency risk management. This is found in Figure 11. 65% of the respondents have the finance department managing currency risk, whereas 24% of the respond-ents have purchasing managing currency risk. Further analysis shows that 34% of the respondents share cur-rency risk management between several departmentsThe 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 purchas-ing 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 purchas-ing department:
Figure 12. Average number of employees in the purchasing department working with sourcing, analyses etc., compared to annual spend
25
20
15
10
5
0
Less
than
50 milli
on
50-1
00 m
illion
More th
an10
,000
milli
on
1,00
0-10
,000
milli
on
600-
1,00
0 milli
on
200-
600 milli
on
100-
200 milli
on
Annual spend (€)
Nu
mb
er
of
em
plo
yees
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
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16 Strategic commodity risk management survey © 2011 All rights reserved
3. Risk management direction setting
• 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 un-derstanding 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
Respondents have limited insights into other catego-ries 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 under-standing 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 cat-egory 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 in-put 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).
Figure 13. For the following categories, state your insight into what drives the suppliers’ expenses (the cost drivers of the suppliers)
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Direct
MRO
IT and
tele-
commun
icatio
n
Person
nel
Capital c
osts
Ener
gy
Logistics
Pack
aging
CAPE
X
Marke
ting
Facil
ity
Profes
siona
l
serv
ices
Figure 14. What is this knowledge applied to?
80%
70%
60%
50%
40%
30%
20%
10%
0%Fact based negotiation
LargeMediumSmall
Change of risk exposure
Making an overview of risk exposure
Input to a future contract strategy
Risk analyses 4
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18 Strategic commodity risk management survey © 2011 All rights reserved
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 – 70% of respondents
Currency and energy risks are considered high on probability and impact. However, only half of the re-spondents focus on these risks. From figure 16, there is good correlation between estimated impact/prob-ability and focus. The immediate conclusion to the re-sults shown in figure 15 is that companies are found to do the right thing.
Considering the significant link between many cate-gories 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 di-vided 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, tel-
ecommunication, etc.)• Capital costs (creditors, debitors)
Figure 15. Which procurement risks do you concentrate on in your risk management work?
4
3,5
3
2,5
2
1,5
1
0,5
0Ho
w m
uch
neg
ati
ve i
nfl
uen
ce d
o y
ou
est
imate
th
e
foll
ow
ing
ris
k t
yp
es
mig
ht
have o
n y
ou
r co
mp
an
y?
With which probability do you estimate the occurrence of the following risk types?
0 0,5 3,532,521,51
Fraud 18%Compliance 40%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 70%
Valcon · Kairos Commodities · Aarhus School of Business · Danish Purchasing- and Logistics Forum
Strategic commodity risk management survey © 2011 All rights reserved 19
4. Risk analyses
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.?
4
3,5
3
2,5
2
1,5
1
0,5
0
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?
0 0,5 3,532,521,51
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%
To
wh
ich
deg
ree d
o y
ou
est
imate
th
at
the
com
mo
dit
y e
xp
osu
re o
f th
e f
oll
ow
ing
cate
go
ries
may h
ave a
neg
ati
ve i
nfl
uen
ce o
n y
ou
r co
mp
an
y?
• Logistics (transport, warehouse, etc.)• Marketing (printing, commercials, market-re-
search, etc.)• MRO (maintenance, spare parts, indirect materi-
als, etc.)• Personnel (recruitment, training, clothing, etc.)• Professional services (audit, consulting, travel,
etc.)
Figure 16 shows that direct, energy, logistics and pack-aging 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 de-spite the fact that this category is considered to be one of the most risky. 32% of the companies work ac-tively 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. How-ever they have not yet begun working actively with managing their risk. Among the other spend-catego-ries less than 1/5 of the respondent companies do not work actively with risk management.
The category focus for active risk management is:
• Direct – 75% of respondents• Energy – 49% of respondents• Logistics and packaging – 32% of respondents
Though energy is a major category, more than 50% does not focus on managing commodity risk on en-ergy. Also logistics and packaging focus seem too low
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?
LargeMediumSmall
Don’t know No Yes
13%
49%50%50%
36%34%
38%
16%16%
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?
LargeMediumSmall
Don’t know No Yes
80%
60%
40%
20%
0%
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4. Risk analyses
Figure 20. Does your company use forecast of commodity prices based on structured analyses of the market development?
80%
70%
60%
50%
40%
30%
20%
10%
0%Don’t know
LargeMediumSmall
No Yes, but only for the most essential commodities
Yes, for all commodities included in the spend
Figure 21. On which basis are the commodity price forecasts made?
80%
70%
60%
50%
40%
30%
20%
10%
0%
Fund
amen
tal
analys
is
LargeMediumSmall
Tech
nica
l ana
lysis
Analys
is of eco
nomic
deve
lopm
ents
Projec
tion ba
sed on
fixed
infla
tion ra
te
Projec
tion ba
sed on
the ba
sis of ind
ex
considering the huge commodity dependency.
Figure 17 shows that the bottom line consequences of fluctuations in the commodity markets are only quan-tified in 50% of the respondent companies. 50% 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 10% decrease or in-crease 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 30% of the respond-ent companies have not made and does not make sys-tematic cost driver analysis. Further, more than 40% 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.
Figure 19 and Figure 20 show that there is only spo-radic analysis and low update frequency of the size of spend that can be attributed to commodities:
Forecasting commodity prices are widely used and seem – surprisingly – to be based on structured analy-sis, which figure 20 and figure 21 show. 80% of the respondents consider structured commod-ity forecasts on market development, which is consid-ered 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.
Figure 19. How often is this analysis updated?
LargeMediumSmall
Regularly
50%
40%
30%
20%
10%
0%Monthly Quarterly Yearly Less often
Risk actions 5
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22 Strategic commodity risk management survey © 2011 All rights reserved
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 40% of the larger respondent companies hedge via financial markets - smaller companies rarely hedge via financial markets. 24% hedges by building inventory
To our surprise figure 23 and figure 24 show that only about 20% of the respondents have procedures de-fined 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. Large 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.
Figure 22. Which of the following tools are applied to act against the risk of commodity price changes?
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Fixed
-pric
e
cont
racts with
supp
liers
LargeMediumSmall
Inde
xed co
ntra
cts
with sup
pliers
Hedging
via
finan
cial m
arke
ts
Phys
ical h
edging
(e.g. b
y co
nstru
cting
wareh
ouse
s)
Figure 23. Has your company defined procedures for the execution of hedging via financial markets?
80%
60%
40%
20%
0%
LargeMediumSmall
Don’t know YesNo
Figure 24. Has your company defined procedures for contractual hedging?
80%
60%
40%
20%
0%
LargeMediumSmall
Don’t know YesNo
Valcon · Kairos Commodities · Aarhus School of Business · Danish Purchasing- and Logistics Forum
Strategic commodity risk management survey © 2011 All rights reserved 23
5. Risk actions
Figure 25. Are the following points defined in the procedure for hedging via financial markets?
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Limita
tion of th
e
minim
al par
t of
spen
d th
at sho
uld
be hed
ged
LargeMediumSmall
Limite
d of th
e max
imum
part
of spe
nd th
at can
be hed
ged
Maxim
um ti
me fra
me
Applica
ble fin
ancia
l
instru
men
ts
Figure 26.
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?
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?
Contracts with indexbased price agreements
Long-term fixed price contracts
Contracts with indexbased price agreements
Long-term fixed price contracts
38% 14%
7% 41%
Figure 27. What type of index is mainly the basis for the index-based price agreements with suppliers?
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%Large SmallMedium
Consumer price index (e.g. from national statistics agencies)Price index for cost driver (e.g. metal prices from commodity exchanges)
Taking a closer look at the financial hedging proce-dures, we see a substantial use of several levers, which is seen in figure 25.
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 26. 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 driv-ers 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 agree-ments. 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 cor-respond to actual price developments or at best they change too late.
Valcon · Kairos Commodities · Aarhus School of Business · Danish Purchasing- and Logistics Forum
24 Strategic commodity risk management survey © 2011 All rights reserved
5. Risk actions
Turning to direct spend, renegotiation is found from figure 29 to take place with fixed frequency and is not based on commodity analysis. 50% of the respondent companies renegotiate their direct spend categories at regular intervals pending on the supplier agreement. We recommend that re-negotiation 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 renegotia-tion timing
The same tendency goes for energy spend. Figure 29 shows that renegotiation is taking place with fixed fre-quency and is not based on a commodity analysis. 46% of the respondent companies renegotiate their energy spend categories at regular intervals pend-ing the supplier agreement. We recommend that re-negotiation 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 analy-sis.
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 cat-egories under the most favourable market conditions. The price level differences in commodity markets and commodity driven markets often make out a differ-ence in the area of 50-100% 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, para-mount opportunities are missed.
Figure 29. When are contracts renegotiated within each of the following categories? – Energy compared to energy’s share of total spend
60%
50%
40%
30%
20%
10%
0%
Don’t
know
Less than 5%5%-9.9%10%-15%More than 15%
In re
gular i
nter
vals
depe
nding
on th
e du
ratio
n of th
e de
al (e
.g.
by exp
iry of c
ontra
ct or y
early
)
Whe
n ex
tern
al eve
nts
mak
e it
nece
ssar
y
Whe
n th
e pu
rcha
sing
depa
rtmen
t has
reso
urce
s
Whe
n so
urcin
g initiatives
are laun
ched
On th
e ba
sis of a
nalysis
of
commod
ity pric
e de
velopm
ent
Figure 28. When are contracts renegotiated within each of the following categories? – Direct compared to direct’s share of total spend
60%
50%
40%
30%
20%
10%
0%
Don’t
know
Less than 25%25%-50%More than 50%
In re
gular i
nter
vals
depe
nding
on th
e du
ratio
n of th
e de
al (e
.g.
by exp
iry of c
ontra
ct or y
early
)
Whe
n ex
tern
al eve
nts
mak
e it
nece
ssar
y
Whe
n th
e pu
rcha
sing
depa
rtmen
t has
reso
urce
s
Whe
n so
urcin
g initiatives
are laun
ched
On th
e ba
sis of a
nalysis
of
commod
ity pric
e de
velopm
ent
Supporting methods, tools and systems 6
Valcon · Kairos Commodities · Aarhus School of Business · Danish Purchasing- and Logistics Forum
26 Strategic commodity risk management survey © 2011 All rights reserved
6. Supporting methods, tools and systems
Figure 32. From which source do you get the externally made commodity price forecasts?
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%Suppliers
LargeMediumSmall
Researchinstitutes
News media
CustomersBanks
Figure 31. Who attend these cross-organisational meetings about commodity price risk management?
100%
80%
60%
40%
20%
0%
The pu
rcha
sing
depa
rtmen
t
LargeMediumSmall
The fin
ance
depa
rtmen
t
The ac
coun
ting
depa
rtmen
tTh
e to
p
man
agem
ent
The sa
les
depa
rtmen
t
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?
60%
50%
40%
30%
20%
10%
0%
LargeMediumSmall
Don’t know YesNo
Finance and sales only participate in meetings regard-ing commodity prices in about 25% of the respondent companies which is found from figure 30. From figure 31, only 55% of the respondent compa-nies are found to arrange cross-functional meetings about commodity price risk. At those meetings pur-chasing department and top management are most often the participants. This is seen in figure 31.
It is found alarming that finance and sales only par-ticipate in respectively 50% and 39% of the meetings that are actually held regarding commodity prices risk.
Suppliers and research institutes are the major pro-viders 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 insti-tutes are often the most objective sources available, which reduces the risk of receiving biased information regarding price forecasts.
52% gets commodity price forecasts from news me-dia ➞ The information from news media is often frag-mented and event driven tending to focus too much on individual and often random events.
42% 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 mar-ket.
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.
The way forward for commodity risk management 7
Valcon · Kairos Commodities · Aarhus School of Business · Danish Purchasing- and Logistics Forum
28 Strategic commodity risk management survey © 2011 All rights reserved
7. The way forward for commodity risk management
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 abnor-mal commodity price fluctuations and it seems as this tendency is increasing if we evaluate the current mar-ket situation. This survey shows that the task of man-aging 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 lead-ing 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 cur-rencies based on the VaR – value at risk methodol-ogy. 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 man-agement 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 re-
sponses ∙ Governance, procedures, processes and poli-
cies ∙ Reporting, controlling and compliance proce-
dures ∙ Automated off limit monitoring and alert sys-
tem
2. Industry average steps to success
• Immediately begin to collaborate with finance and start measuring (and reporting) regularly on com-modity and currency risks at category and portfolio level – Start to quantify risk based on VaR – value
Figure 33. Does the purchasing department plan to make its own risk management strategy?
60%
50%
40%
30%
20%
10%
0%
LargeMediumSmall
Don’t know YesNo
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.
Procurement 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.
10
0 C
om
pete
nci
es
10
Clu
sters
2 G
en
eri
c
Personality Profile
Busi
nes
sCom
pet
enci
es Functio
nal
Com
peten
cies
Communication & Influencing
Change &Strategy
Leadership &Mangement
Organising& Planning
Analysis &Systems
Cost & ValueManagement
StrategicSourcing
RiskManagement
SupplierManagement
Negotiation& Contracting
The ability to segment and analyse category spend information to drive commercial insights.
Support the development of the category spend profile.
Produces structured breakdowns of historic category spend and
volumes.
Produces price history breakdowns at a sub-category
and business level. Identifies key price drivers
Identifies and takes into consideration demand level factors. Analyses forecast
demand at sub-category and business levels to create insight
and opportunity.
BASIC1 2 DEVELOPING3 4 PROFESSIONAL5 6 ADVANCED7
Positions detailed spend category profiles that result in stakeholder understanding and full support for the category sourcing initiatives.
Implements solutions to automate date gathering and ongoing spend
profiling
EXPERT8 9 10
1 7 8
CATEGORY SPEND PROFILINGCurrent Competency level
Required Competency level
Competency Gap
Business Critical 5High 4Medium 3Low 2Not Relevant 1
Priority: Level:COMPETENCY:
Definition:
Category Spend Profiling creates a segmented profile of the spend, volumes, specifications, price history and contracts for a category of spend. Itinvolves gathering detailed information from a number of sources including spend databases, MRP systems, supplier invoices, contracts, budgetsand internal stakeholders. Summarise and consolidate the information to create summary charts covering all the main areas.
Description:
Key features:• Gather information from a wide range of sources• Create summary graphs and charts• Analyse the information to get commercial insights• Add to the profile as more information is available• Create a baseline for ongoing sourcing activities
Tools & techniques:• Spend analysis• Invoice analysis• Category segmentation• Contract analysis• Spreadsheets and summary charts
© Copyright Future Purchasing & DILF, 2009
The ability to segment and analyse category spend information to drive commercial insights.
Support the development of the category spend profile.
Produces structured breakdowns of historic category spend and
volumes.
Produces price history breakdowns at a sub-category
and business level. Identifies key price drivers
Identifies and takes into consideration demand level factors. Analyses forecast
demand at sub-category and business levels to create insight
and opportunity.
BASIC1 2 DEVELOPING3 4 PROFESSIONAL5 6 ADVANCED7
Positions detailed spend category profiles that result in stakeholder understanding and full support for the category sourcing initiatives.
Implements solutions to automate date gathering and ongoing spend
profiling
EXPERT8 9 10
1 7 8
CATEGORY SPEND PROFILINGCurrent Competency level
Required Competency level
Competency Gap
Business Critical 5High 4Medium 3Low 2Not Relevant 1
Priority: Level:COMPETENCY:
Definition:
Category Spend Profiling creates a segmented profile of the spend, volumes, specifications, price history and contracts for a category of spend. Itinvolves gathering detailed information from a number of sources including spend databases, MRP systems, supplier invoices, contracts, budgetsand internal stakeholders. Summarise and consolidate the information to create summary charts covering all the main areas.
Description:
Key features:• Gather information from a wide range of sources• Create summary graphs and charts• Analyse the information to get commercial insights• Add to the profile as more information is available• Create a baseline for ongoing sourcing activities
Tools & techniques:• Spend analysis• Invoice analysis• Category segmentation• Contract analysis• Spreadsheets and summary charts
© Copyright Future Purchasing & DILF, 2009
The ability to segment and analyse category spend information to drive commercial insights.
Support the development of the category spend profile.
Produces structured breakdowns of historic category spend and
volumes.
Produces price history breakdowns at a sub-category
and business level. Identifies key price drivers
Identifies and takes into consideration demand level factors. Analyses forecast
demand at sub-category and business levels to create insight
and opportunity.
BASIC1 2 DEVELOPING3 4 PROFESSIONAL5 6 ADVANCED7
Positions detailed spend category profiles that result in stakeholder understanding and full support for the category sourcing initiatives.
Implements solutions to automate date gathering and ongoing spend
profiling
EXPERT8 9 10
1 7 8
CATEGORY SPEND PROFILINGCurrent Competency level
Required Competency level
Competency Gap
Business Critical 5High 4Medium 3Low 2Not Relevant 1
Priority: Level:COMPETENCY:
Definition:
Category Spend Profiling creates a segmented profile of the spend, volumes, specifications, price history and contracts for a category of spend. Itinvolves gathering detailed information from a number of sources including spend databases, MRP systems, supplier invoices, contracts, budgetsand internal stakeholders. Summarise and consolidate the information to create summary charts covering all the main areas.
Description:
Key features:• Gather information from a wide range of sources• Create summary graphs and charts• Analyse the information to get commercial insights• Add to the profile as more information is available• Create a baseline for ongoing sourcing activities
Tools & techniques:• Spend analysis• Invoice analysis• Category segmentation• Contract analysis• Spreadsheets and summary charts
© Copyright Future Purchasing & DILF, 2009
The ability to segment and analyse category spend information to drive commercial insights.
Support the development of the category spend profile.
Produces structured breakdowns of historic category spend and
volumes.
Produces price history breakdowns at a sub-category
and business level. Identifies key price drivers
Identifies and takes into consideration demand level factors. Analyses forecast
demand at sub-category and business levels to create insight
and opportunity.
BASIC1 2 DEVELOPING3 4 PROFESSIONAL5 6 ADVANCED7
Positions detailed spend category profiles that result in stakeholder understanding and full support for the category sourcing initiatives.
Implements solutions to automate date gathering and ongoing spend
profiling
EXPERT8 9 10
1 7 8
CATEGORY SPEND PROFILINGCurrent Competency level
Required Competency level
Competency Gap
Business Critical 5High 4Medium 3Low 2Not Relevant 1
Priority: Level:COMPETENCY:
Definition:
Category Spend Profiling creates a segmented profile of the spend, volumes, specifications, price history and contracts for a category of spend. Itinvolves gathering detailed information from a number of sources including spend databases, MRP systems, supplier invoices, contracts, budgetsand internal stakeholders. Summarise and consolidate the information to create summary charts covering all the main areas.
Description:
Key features:• Gather information from a wide range of sources• Create summary graphs and charts• Analyse the information to get commercial insights• Add to the profile as more information is available• Create a baseline for ongoing sourcing activities
Tools & techniques:• Spend analysis• Invoice analysis• Category segmentation• Contract analysis• Spreadsheets and summary charts
© Copyright Future Purchasing & DILF, 2009
The ability to segment and analyse category spend information to drive commercial insights.
Support the development of the category spend profile.
Produces structured breakdowns of historic category spend and
volumes.
Produces price history breakdowns at a sub-category
and business level. Identifies key price drivers
Identifies and takes into consideration demand level factors. Analyses forecast
demand at sub-category and business levels to create insight
and opportunity.
BASIC1 2 DEVELOPING3 4 PROFESSIONAL5 6 ADVANCED7
Positions detailed spend category profiles that result in stakeholder understanding and full support for the category sourcing initiatives.
Implements solutions to automate date gathering and ongoing spend
profiling
EXPERT8 9 10
1 7 8
CATEGORY SPEND PROFILINGCurrent Competency level
Required Competency level
Competency Gap
Business Critical 5High 4Medium 3Low 2Not Relevant 1
Priority: Level:COMPETENCY:
Definition:
Category Spend Profiling creates a segmented profile of the spend, volumes, specifications, price history and contracts for a category of spend. Itinvolves gathering detailed information from a number of sources including spend databases, MRP systems, supplier invoices, contracts, budgetsand internal stakeholders. Summarise and consolidate the information to create summary charts covering all the main areas.
Description:
Key features:• Gather information from a wide range of sources• Create summary graphs and charts• Analyse the information to get commercial insights• Add to the profile as more information is available• Create a baseline for ongoing sourcing activities
Tools & techniques:• Spend analysis• Invoice analysis• Category segmentation• Contract analysis• Spreadsheets and summary charts
© Copyright Future Purchasing & DILF, 2009
The ability to segment and analyse category spend information to drive commercial insights.
Support the development of the category spend profile.
Produces structured breakdowns of historic category spend and
volumes.
Produces price history breakdowns at a sub-category
and business level. Identifies key price drivers
Identifies and takes into consideration demand level factors. Analyses forecast
demand at sub-category and business levels to create insight
and opportunity.
BASIC1 2 DEVELOPING3 4 PROFESSIONAL5 6 ADVANCED7
Positions detailed spend category profiles that result in stakeholder understanding and full support for the category sourcing initiatives.
Implements solutions to automate date gathering and ongoing spend
profiling
EXPERT8 9 10
1 7 8
CATEGORY SPEND PROFILINGCurrent Competency level
Required Competency level
Competency Gap
Business Critical 5High 4Medium 3Low 2Not Relevant 1
Priority: Level:COMPETENCY:
Definition:
Category Spend Profiling creates a segmented profile of the spend, volumes, specifications, price history and contracts for a category of spend. Itinvolves gathering detailed information from a number of sources including spend databases, MRP systems, supplier invoices, contracts, budgetsand internal stakeholders. Summarise and consolidate the information to create summary charts covering all the main areas.
Description:
Key features:• Gather information from a wide range of sources• Create summary graphs and charts• Analyse the information to get commercial insights• Add to the profile as more information is available• Create a baseline for ongoing sourcing activities
Tools & techniques:• Spend analysis• Invoice analysis• Category segmentation• Contract analysis• Spreadsheets and summary charts
© Copyright Future Purchasing & DILF, 2009
The ability to segment and analyse category spend information to drive commercial insights.
Support the development of the category spend profile.
Produces structured breakdowns of historic category spend and
volumes.
Produces price history breakdowns at a sub-category
and business level. Identifies key price drivers
Identifies and takes into consideration demand level factors. Analyses forecast
demand at sub-category and business levels to create insight
and opportunity.
BASIC1 2 DEVELOPING3 4 PROFESSIONAL5 6 ADVANCED7
Positions detailed spend category profiles that result in stakeholder understanding and full support for the category sourcing initiatives.
Implements solutions to automate date gathering and ongoing spend
profiling
EXPERT8 9 10
1 7 8
CATEGORY SPEND PROFILINGCurrent Competency level
Required Competency level
Competency Gap
Business Critical 5High 4Medium 3Low 2Not Relevant 1
Priority: Level:COMPETENCY:
Definition:
Category Spend Profiling creates a segmented profile of the spend, volumes, specifications, price history and contracts for a category of spend. Itinvolves gathering detailed information from a number of sources including spend databases, MRP systems, supplier invoices, contracts, budgetsand internal stakeholders. Summarise and consolidate the information to create summary charts covering all the main areas.
Description:
Key features:• Gather information from a wide range of sources• Create summary graphs and charts• Analyse the information to get commercial insights• Add to the profile as more information is available• Create a baseline for ongoing sourcing activities
Tools & techniques:• Spend analysis• Invoice analysis• Category segmentation• Contract analysis• Spreadsheets and summary charts
© Copyright Future Purchasing & DILF, 2009
The ability to manage and improve the performance of individuals and teams.
Sets personal measurable goals that are realistic but challenging with dates for accomplishment.
Sets employees performance standards that are specific and measurable. Helps them get the
information and resources to accomplish the work effectively.
Support employees in their efforts to achieve job goals by providing resources, removing obstacles. Seeks performance feedback from manager and from others
whom he/she interacts on the job.
Provides specific performance feedback, both positive and
corrective, as soon as possible after an event. Prepares a
personal development plan with specific goals and a timeline for
their accomplishment.
BASIC1 2 DEVELOPING3 4 PROFESSIONAL5 6 ADVANCED7
Deals firmly and promptly with performance problems; lets
people know what is expected of them and when. Takes significant action to develop skills needed for effective managing performance
in current or future job.
EXPERT8 9 10
1 7 8
MANAGING PERFORMANCECurrent Competency level
Required Competency level
Competency Gap
Business Critical 5High 4Medium 3Low 2Not Relevant 1
Priority: Level:COMPETENCY:
Definition:
Taking responsibility for your own and employees´ performance, by setting clear goals and expectations, tracking progress against the goals, ensuringfeedback, and addressing performance problems and issues promptly. Performance management is also the process of creating a work environmentor setting in which people are enabled to perform to the best of their abilities.
Description:
Key features:• Clear job descriptions & objectives• Gives regular, constructive feedback on performance• Guides staff in understanding operational priorities• Effective compensation & recognition systems • Provide promotional/career development opportunities for staff
Tools, techniques & behavioural indicators:• PDCA-cycles (Plan-Do-Check-Act)• Coaching & Feedback • Setting clear and measurable objectives and goals• Performance management policies and processes
© Copyright Future Purchasing & DILF, 2008
Compass – The web-based comprehensive competence assessment system
Compass is a comprehensive competency assessment solu-tion for procurement. Individuals assess their competencies against ideal role profi les, these assessments are compared with managers views, gaps against the ideal profi le are identifi ed and prioritised, and personal development plans produced.
Each organisation is unique, with its own challenges, struc-ture, objectives, job specifi cation and strategic initiatives. We work with our clients to customise our competency framework to fully match with their specifi c needs. The on-line competency assessment is carried out through a mixture of self-assessment and interviews.
We have worked with leading organisations, & our col-leagues 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 specifi cally for procurement • Can be customised for each client and applied at all
organizational levels
Request more information:[email protected]@dilf.dk
direction matters
Compass procurement competency assessment structure
Valcon · Kairos Commodities · Aarhus School of Business · Danish Purchasing- and Logistics Forum
30 Strategic commodity risk management survey © 2011 All rights reserved
7. The way forward for commodity risk management
at risk methodology. There is often unclear govern-ance and confused roles between finance and pro-curement in their leadership responsibilities. The accountability for commodity price risk manage-ment lies squarely with procurement, but it must be integrated with the currency responsibility of fi-nance. The two are inter-dependent, with currency fluctuations having a huge impact on commodity prices. This calls for much closer co-operation, with regular reviews of volatile markets being essential. As a minimum there should be a monthly review cycle and a bi-annual commodity operating plan. Also, because many companies are now focused at sub-category management, they may have an inadequate cross-category perspective. That has to be addressed. One option is to build centres of excellence, commodity by commodity.
• Develop a desired risk profile including risk limits. Develop and implement risk mitigation strategies and actions – The main board, corporate risk man-agement groups, the finance function and procure-ment leadership team should be extremely focused on this, if the VaR is unacceptably high. Unfortu-nately many companies have no idea how to calcu-late this, and there is often a complete absence of focus, direction and action planning.
• Establish governance regarding, processes, poli-cies and procedures regarding risk management.
• Establish a plan to drive regular, formal and in-formal communications between procurement, fi-nance and other key stakeholders.
• Integrate the risk management aspect into your category management, contract strategies and supplier management concepts and processes.
• Establish automatic past performance monitor-ing on contracting and hedging decisions bench-marked against the market and alternatives.
• Conduct formal competence assessment in the area of strategic commodity risk management and financial risk management.
• Build up capability within the procurement function in the area of commodity risk management finan-cial risk management through training and recruit-ment activities.
• Adopt online access to updated market data and analysis so that the function 24/7 is on top of the situation in regards to the volatile commodity mar-kets – monthly or quarterly reports are insufficient with the current level of volatility. Apply innova-tive analytical tools. There can be a huge return on investment from using much stronger analytics. Far too many companies have limited understand-ing of the cost drivers behind major commodi-ties. Decision-making needs to be fact-based, and draw on fundamental and business cycle analysis (proper analysis of the macro drivers of supply and demand); technical analysis and contract tim-ing (interpreting early market signals and relative strength indicators warning of forthcoming rises or
Adopt online access to updated market data and analysis so that the function 24/7 is on top of the situation in regards to the volatile commodity markets – monthly or quarterly reports are insufficient with the current level of volatility. Apply innovative analytical tools.
The accountability for commodity price risk management lies squarely with procurement, but it must be integrated with the currency responsibility of finance. The two are inter-dependent, with currency fluctuations having a huge impact on commodity prices.
Valcon · Kairos Commodities · Aarhus School of Business · Danish Purchasing- and Logistics Forum
Strategic commodity risk management survey © 2011 All rights reserved 31
7. The way forward for commodity risk management
falls in price); online access to price data feeds; dynamic contract strategy (e.g. fixed vs. floating pricing); and the full range of hedging strategies and financial instruments.
3. Best-in-class steps to success
• Establish automated simulation capability in order to support decisions on hedging programs.
• Establish automated monitoring and alerts on off-limit risks.
• Mitigate risk and manage supplier risk manage-ment performance by implementing an enterprise-wide supplier risk management program and work more collaboratively with key suppliers to mitigate risk on tier 1+2 level.
• Expand the risk management approach to catego-ry/product cost driver level for finished and semi-finished products.
• Build up capability in the area of integrative ap-proaches in contracting strategy to balance the triangle of category strategy/supplier strategy/risk sharing strategy.
• Start to work with risk issues with your most im-portant suppliers in the same way you do it in the case of cost, quality etc. It must be built in to your supplier-selection processes as well as your sup-plier performance management cycle. Risk is the mother of cost – the risk dialogue is more impor-tant than the dialogue regarding 2-5% cost im-provement year on year.
• Staff categories strategically in order to ensure the best fit between the category strategy and the per-sonality of the category manager.
• Investigate possibilities of derivatives for non hedgeable commodities/products e.g. plastics/oil.
In today’s economic climate, competitive advantage is no longer only tied to time-to-market, process ef-ficiency and cost control. Risk management has come to the fore as both a protective posture and potential weapon. Companies that are able to quantify and fore-see potential commodity and currency risks, establish coherent policy and mitigation plans, and share infor-mation with all key stakeholders, will without doubt achieve significantly higher overall performance. /
Expand the risk management approach to category/product cost driver level for finished and semi-finished products.
Risk management has come to the fore as both a protective posture and potential weapon.
Risk is the mother of cost – the risk dialogue is more important than the dialogue regarding 2-5% cost improvement year on year.
Valcon · Kairos Commodities · Aarhus School of Business · Danish Purchasing- and Logistics Forum
32 Strategic commodity risk management survey © 2011 All rights reserved
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