Most commodity trading firm or firms that engage in some aspect of commodity supply chains, have a huge and well-known challenge in dealing with complexity, especially when they deal in multiple commodities. This complexity can be boiled down for the sake of this article to the following,
- Each commodity has different physical properties that impact things like transportation and movement, quality and pricing, and packaging and storage,
- Each commodity supply chain involves different processes and assets – all of which need to be managed and optimised,
- Commodity consumers have a growing awareness of environmental and social issues related to commodity supply chains from child labour to deforestation and require reassurances,
- Many of these supply chains continue to rely on the exchange of paper documents and the performance of third-parties like shippers and agents, for example,
- To help mitigate risk and also to encourage investor appetites, there are more and more derivative instruments, and financial and physical products available; many based on a ‘standard’ commodity definition,
- Commodity trading has come under the keen eye of the regulator in recent years and trades are subject to increased regulation from trade reporting and trade surveillance to position limits and other rules.
There are of course other complexities and challenges but the above provides enough perspective. The speed of change of technology also adds complexity as to reduce costs or optimise processes, many firms are migrating to the cloud or deploying technologies like automation, blockchain and so on.
Complexity and Systems
Managing the complexities is a challenge and one that in part often utilises systems. Typically, the key business system will be the Commodity Trading & Risk Management solution or ERP for commodities (Commodity Management) software. However, many other systems will also be deployed including for price feeds, accounting, treasury, risk analytics and models, document management, contract management, optimisation of things like assets, production, consumption, assays and chemical analyses and much, much more. Given that many firms will use more than one CTRM selecting solutions for groups of commodities with different properties or supply chains, the mishmash of systems reflects the complexity of the business. And then there is the myriad of spreadsheets used to support them and users.
Research performed by Commodity Technology Advisory in 2015 showed that a vast majority (90% of all respondents) were concerned to some degree about the use of spreadsheets at their company, with over 40% indicating they were very concerned.
Of course, most of these solutions are probably not well integrated or even interfaced. Many will also be ageing technology investments built on different era technology platforms using different user interface designs. ‘Mishmash’ is probably an apt description when it comes to many application environments in commodity-related firms and this just makes the complexity more difficult to deal with posing risks to the business and its operations. Add to this the falling profit margins in commodity trading and it can be seen that the key to profitability can be in optimising supply chains and making them more efficient. Indeed, managing operational risk where penalties and additional fees can result in lost trading profit is now rightly a key focus for most commodity players.
There is no apparent fix to this system's complexity either. The industry cycles between trying to design, build and deploy the all-singing, all-dancing system that caters for all commodities and business functions to breaking everything up into smaller more agile solutions glued together by APIs (ecosystems) and between buying commercial solutions and building custom solutions. In reality, none of these approaches has yet solved the issue.
Empowering the User
Despite this (and Adaptive has its own views and innovative approaches to designing, building and deploying CTRM solutions – see these recent blogs on the topic Rethinking CTRM – Part One, Part Two, Part Three and Part Four), one area where Adaptive sees an opportunity to streamline, increase efficiency and reduce error is in using automation and AI to assist system users to perform their job. For the user, identifying what needs to be done, when it can be done and, perhaps just as importantly, on which system and screen it should be done, occupies a great deal of time and effort. Prioritising tasks and activities to avoid delays, penalties and errors is key to managing operational risk as well as providing greater job satisfaction for employees.
daptive has worked with clients to develop automated user environments where the users’ day is guided by technology not just in terms of what needs to be done and how to prioritise it but also in helping the user navigate through the mishmash of systems and screens to find and process the data needed to complete these activities. A combination of workflow, automation and AI can deliver a powerful assist in increasing efficiency and reducing operational risk.
Contact us for more information on how you can empower your users.
CEO and co-founder,
Adaptive Financial Consulting