DYNAMIC MARGIN MANAGEMENT


Dynamic Margin Management (DMM) TM


How to improve Performance of a Processing Business by using smart, proven technology


The Big Squeeze


Commodity-based processing industries are feeling the pressure of ever-tighter margins. Whether you are a food or feed miller, crusher, maltster or brewer, food or starch producer, a vegetable oil refiner or bio-fuel producer, you are invariably accompanying with a complex business model and a culture of established business practices. But, when the squeeze comes, size and history offer little protection. Financial pressure can come from multiple directions such as run-up in procurement costs, drop in sales, price volatility, ineffective hedges, and not to forget the ever-changing impact of foreign exchange exposure, variable energy and packaging costs. At times even as a perfect storm all at the same time... Like Lord Sauron’s dreaded Nazgul riders, they are relentless and vindictive foes to sustainable margins.


Maybe the “Lord of the Rings” comparison exaggerates the challenge, but most processors have experienced extreme cost/ revenue/ margin issues since 2000. We are in a “New Normal”. And, when margins are under pressure, the unanswerable questions about margin development, hedging programs, risk exposures and positions, contractual optionality, price stress effects and more, rain down from the C-suite onto middle management …. Or onto the C-suite from the Board, Banks and the shareholders.


Is this another pitch for the unglamorous past time of gathering and using excellent and readily-available data to be able to improve the business? Unashamedly, YES. But it doesn’t stop there.


When the squeeze is on, management cries out for the ability to smartly and quickly assess current strategies and risks, optimise inputs and outputs, hedge/ unwind hedges, synchronize business initiatives and while always knowing and understanding the impact on results. This is what progressive organisations work to establish. Tradesparent BV refers to it as their “Dynamic Margin Management” tm concept. Actively using the data to drive better decisions and performance: regularly – weekly and even daily.


The Good News


There is no need to rely on meeting Aragorn (the world’s best salesman?) or Legolas (the world’s best trader?) to put a business in good health. Practical experience has shown that there are very substantial benefits of downside insurance and profit maximisation when all the parts of the business are working in harmony. When the data in play is current, believable, consistent and available to cross-functional teams of responsible managers, all manner of smart choices are made.


And, by the way, the challenge is not “too big”. It is never too big, it just needs focus, a smart approach and acceptance that it is “too important” not to tackle.


But First, A Corporate Polygraph


Managing your yields and margins starts with awareness and confidence of where you stand. Without insight into your actual exposures and commitments (i.e. physical and financial positions), it will always be a challenge to manage your company’s margin.


To be able to manage all your trading and processing activities thoroughly, two important questions should be answered:


1) Do you know your company’s exposure in the market on both the procurement as well as the sales side of the business? (i.e. do you know the effect of sudden market movements on your margin i.e. the Risk?)

2) Do you like and accept the market risk that you are taking?


If one of the above questions is answered with “No” or “Maybe”, there is a problem. We would strongly urge you to take the appropriate measures to get informed and be in control of managing and improving margins. Provide yourselves with the data-driven insight you need to manage your commodity and production portfolio in a holistic way, while defining the risk appetite you are comfortable with and able to absorb.


Relevance to Our Processing World


Is this simply mumbo-jumbo inherited from the futures trading world? NO, it is a practical and proven approach to managing margins in an open market. Discussions across the various functions about unhedged risk and true margin projections (not budget assumptions) are the basis for improving performance.


Examples of core data that should be current in your armory include Bill of Material (BOM), yields, open positions, planning profiles and prices. This data needs to be current and correct in order to control and oversee the whole process from raw material crushing and processing until the production and sale of the finished good.


In our experience, having all this information “on tap” generates a wealth of insights, on which the business can then act. No more driving blindly, or horrible surprises when reality hits after a drift of one or other parameter in the profit equation.


For example, TRADESPARENT's BOM & Yield engines combines and uses all these data points to automatically provide profiles on the information needed by senior management: from straight forward positions to forward margins, sales margins and other contributing factors. And it is in use today, helping top global processors to protect and enhance their margins.


Where do We Start?


In order to access this wealth of information you need data on the specific processing, procurement, hedging and trading activities within the business. You probably have a lot of this data and equations in various systems and spreadsheets. However, usually it is separated by departmental or geographic boundaries and may even be ‘locked up’ in legacy systems. This may ring some bells, but change to openness and collaboration is inevitable.


The Dynamic Margin Management (DMM) TM solution brings all this data to life. The categories below illustrate some of the base data points to provide a good business overview. The others are, in a way, “optional”, but they increase the level of granularity and understanding to a level demanded by forward-thinking bosses.


Base Requirements

  • BOM [Bill of Material]

  • BOM configurations

  • Yield conversions - Plant and Product Level

  • Contracts (Both Financial and Physical) and Stocks

  • Contract Prices


Additional Requirements

  • Sales Planning [The engine translates the planning data to the raw material requirement]

  • Market Prices [The engine uses market prices to calculate the margin forecast]

  • Budget [The engine compares the budget with the current forecast to provide full insight]


In other words, TRADESPARENT runs on the minimum information. The moment you start adding detail, the quality and range of analytical possibilities will improve. From our experience, starting with a solid base and keep adding levels of information, has proven to be very effective and takes away data quality restrictions as a starting point.


In Tune with the Processing Business?


The core capability of Dynamic Margin Management (DMM)TM is that it enables a clear overview of all positions: Outright, Against Capacity and Planning, Net Equivalent (i.e. Soymeal in Beans Equivalent). But the great thing about the engine is that it reflects the two main ways that processing industries actually operate. First, it can work from the point of view of the Finished Goods or Sales Product, which determines the raw material requirement both in value and/or volume. Secondly, it can work from the raw material view, which determines the amount or value of finished products the process will yield. Subsequently plant/regional/business-discipline views can be added in order to add different dimensions.


To get all relevant data aggregated and structured according to one or multiple master data sets has proven to be a major challenge in the industry. This is because of many legacy systems and data-processing methods. This issue is solved by having one place where all data is maintained and organized.


TRADESPARENT recognized this issue at the outset and provides the necessary platform. For example, raw material data/yield conversions provide a great insight on the processing landscape of your plant or business. And now all the data is in one aggregated spot to reveal what managers need to see – without waiting for a re-run of the annual budget process. You now have: 1) clear position overviews (2) the planning and plant capabilities and (3) BOM per raw material and sales products.


In short, the TRADESPARENT BOM & Yield engine creates one comprehensive model on the full processing activity.


A Look Under the Hood - Raw Material requirement


The process maps summarize how the Yield/BOM engine of TRADESPARENT functions. Both Crushing and Refining processes are addressed in these visualizations. If we look at Figure 1 we can see that a particular Sales product (namely Frying BLD Oil) is composed out of 2 crude oil products (48% Corn Oil and 53% Soy Oil). This information is gathered out of the BOM data of this particular product. Subsequently both the Corn and Soy oil have a BOM of their own. This principle continues all the way throughout the process down to the level of raw material/energy input. If we look at the process from a procurement point of view, we have a specific amount/value of raw material. With the yield conversion data we can calculate specific output in particular processes. For example, the crush process requires both Soybeans and Energy as raw materials and provides yields in Meal, Oil and By-products. This also can be done from a value perspective whereby the raw material and energy input is considered as a cost of sales.


Figure 1: Shows the long/short on the forward curve of Meal Sales against the Beans purchases


Crush Process - figure1



In Figure 2 the degree of complexity is increased, and a refining process is added into scope. The engine works similarly to that shown in Figure 1, and illustrates how it can be adapted for more extensive analysis.


Crush & Refining Process - figure2



A Look Under the Hood - Sales Margin Calculation


By having full insight on the planning, position, price and market price of both the sales product and all the individual components for this sales product, the sales margin can be calculated.


The TRADESPARENT DMM engine works with 2 steps:


1 Variable Cost Calculation

  • First all cost components are calculated/imported (BOM). The cost of an individual product is considered as the committed volume * contract price and/or planning volume * market price

  • Total BOM cost (Sum of all individual costs) is the variable cost for the Sales Product

2 Sales Product Position and Planning

  • By adding planning and contractual positions of the Sales product you calculate your historical margin and also see the forward sales margin.

Depending on the data available the sales margin can be shown by plant, market segment, country, region or any other dimension through the different dashboards and homepages available as standard in the DMM module.


Why Work Differently?


TRADESPARENT's Dynamic Margin Management TM module, with its unique BOM & Yield engine, provides processing companies the total overview and insight into their processes. The module enables complete transparency by bringing all components together in one comprehensive margin forecast model to unite and optimize sales and procurement decisions at a global scale.


This approach is in active use since 2011 by industry leaders, protecting and improving their margins.


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