There are several definitions but commonly an Enterprise Resource Planning (ERP) system automates and integrates core business processes such as taking customer orders, scheduling operations and keeping inventory records and financial data. ERP systems have been around and made popular by companies such as SAP, Oracle, Microsoft, NetSuite and a slew of lesser-known vendors.
A fully integrated solution promises to deliver operational efficiencies and improve business results. What’s not to like?
It’s no surprise that softs commodity traders were sold on such an established solution. However, when trading is surrounded by risks and volatility, index pricing and non-standard contract invoicing, they may wonder: Is it Nuts to use ERP instead of CTRM?
Commodity Trading and Risk Management (CTRM) software is aimed at trade-centric companies like traders, physical commodity merchants and marketers. CTRM software allows them to use multi-level book structures, report physical and financial positions (including futures and options) by book, trader, strategy, commodity etc., run risk metrics such as Mark-to-Market and Value at Risk, manage counterparty risk and use hedging strategies for price risk management.
As the above illustrates, CTRM systems are designed to handle the world of commodity trading, with its market volatility, risks, multi-term contracts, variable prices and pricing models, non-standard logistics and settlement/invoicing that is not based on available fixed prices.
Out-of-the-box ERP systems are at their best with handling and automating sales order management for standard products at standard terms with fixed pricing, defined delivery processes and associated invoicing and accounting. While feature-rich ERP systems are not equipped to support the functionality that trade-centric companies require.
Forcing the handling by the ERP system of commodity trading, including position and risk management, flexible logistics and provisional invoicing, only leads to mediocre results. Additionally, customizations are expensive, customer specific and therefore not maintained by the ERP vendor.
Trade-centric companies are dealing with contracts where there is no defined price and where forward market pricing is used for contract calculation and valuation of mark-to-market. They must see their position by each stage in the chain, including purchases, sales, afloat and storage by commodity type.
They require functionality to make changes to orders that cannot be delivered as promised/expected and allow to process and repackage them, adjust for weight, transportation and cost, while maintaining traceability.
This is where CTRM distinguishes itself from an ERP system. Standard CTRM features, like flexible contract pricing, instant VaR and mark-to-market, native credit management and a hedging calendar, appeal to the trader as well as the CFO.
Support for logistics includes easy back-to-backs, logistics for truck, rail, vessel and barge and cost management for shipments, collections and storage. Furthermore, the entire organization benefits from automated workflows and auto-filing of internal and external documents, such as bills of lading, product specifications and certificates of quality and compliance.
CTRM software helps soft commodities trading and brokerage companies to maximize profits and prevent loss in volatile markets. If your business is trade-centric, you’re better off with an integrated solution of CTRM and General Ledger systems.
Moreover, CTRM systems are available as a Software-as-a-Service solution, offering additional operational and cost efficiencies. Yep, it would be nuts to use an ERP instead of a CTRM system.