All in for manufacturers: Total Margin Management and the evolution of treasury, procurement and risk

Mark O'Toole
- Lean - Jan 06, 2016

2015 is likely to be remembered – not necessarily fondly – for challenging and volatile commodities markets. But no one is suggesting the New Year will bring a change – and that means lots of commodity-exposed manufacturing businesses are having to re-think their whole approach to treasury, procurement and risk. In the more predictable markets of the past, many found it possible to manage these functions with a little spreadsheet wizardry, but this simply doesn’t give the visibility required to navigate today’s choppy waters.

It is estimated that 90 per cent of companies with large commodity exposure do not have an integrated system that allows them to manage commodity procurement along with treasury and risk. Rather than Commodity Procurement Risk Management (CPRM) Systems, these businesses have home grown solutions, multiple – in some cases thousands of – spreadsheets or an old legacy database. For one person to gain a clear picture of a company’s entire risk, cash and procurement picture within this context, they would require a computer memory!

The manufacturing industry today could usefully look to learn the lessons of the energy markets from the last couple of decades. Roll back 20 years and energy trading was a relatively simple physical business where participants could manage their hedging on spreadsheets. But after Enron imploded and the major banks jumped in and provided volatility – the industry became very sophisticated in a very short time. The banks introduced complexity around their basic management, risk and accounting systems, as well as other factors such as derivatives and exotic hedging strategies – all of which created an alphabet soup of checks and balances that make it hard to manage from a singular place.    

Many commodity exposed corporates in manufacturing today face the same level of complexity, not to mention new challenges around zero based budgeting and how best to rationalize the IT landscape. The response from some forward-thinking firms is to move towards Total Margin Management, which allows streamlining and integration of some of a corporate treasurer’s most important functions.

By adopting Total Margin Management, a company can manage and monitor margin creation (and destruction) from each and every part of the commodity value chain and source all processes into one singular, real-time platform. A company’s spending; the state of its treasury and its risk exposure are all related and must be kept in mind for all accounting decisions. So why should they all be run on different systems? Not only does it benefit a company’s bottom-line, but a unified system can also provide step-by-step accounting for compliance officers in a way that an excel file simply can’t.

The Nirvana of any organisation with commodity exposure is to put all debt management, commodity management and risk management on a single platform with full transparency. Nirvana is of course tough to reach, but there’s progress, and Total Margin Management is an important step in the evolution of management for commodity-exposed corporates in the manufacturing industry.

Mark O’Toole is the Vice President of Commodities & Treasury Solutions for OpenLink

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