In my decade strong experience in commodity markets, I have seen many a company fall into the trap of trying to adopt an ERP system for a commodities business. I would be interested in being proved wrong, but I am yet to hear of any company that has successfully implemented an ERP solution in place of CTRM software without spending significantly more money than they needed to spend. And then ending up with a highly customized unique version that becomes non-upgradable, expensive to maintain, difficult to enhance, and – well – basically a drag!
So here are some of my thoughts on the potential appeal of an ERP system, and why ERP just cannot do what a specialized CTRM software solution can.
Enterprise resource planning (ERP):
Business management software — typically a suite of integrated applications — that a company can use to collect, store, manage, and interpret data from many business activities.
It's easy to see why this temptation exists – many ERP vendors are established and have been around for some time, provide coverage across the business with lots of implementation experience, etc. And if you are a commodities company already using an ERP to manage accounting or other functions, extending its use sounds logical. Especially when the ERP vendor claims that the software is being made to work for commodities companies.
However, there are several reasons ERPs fail for commodities companies.
Let’s face it, commodities businesses are the non-medical equivalent of neurosurgery (and that makes us feel proud). Just so many things about the commodities business are unique and complicated, and getting an outsider to fully grasp its nuances is extremely hard. Try explaining commodities to your cousin who makes bathroom accessories. The point is that the way we contract, manage risk, ship, store, invoice, price, talk (!) – is just plain simply too different!
Will you try to drive a car on a rail track? I'd say no, unless you're in a Hollywood movie. Although the two options (car and train) are seemingly trying to solve the same problem (to get us from point A to point B), and do indeed have many common ingredients, they are fundamentally different. The same is true for ERP versus CTRM software.
The architecture of CTRM software has been built with the specific needs of commodities companies in mind. (Learn more about changes happening in CTRM software in "Top 3 Influencers in CTRM Software.") This contrasts sharply with what an ERP is designed for. Can it be done – sure. Will it be efficient – nope. And can it handle all the unique situations that can occur, for example, speed bumps, wandering animals, muddy conditions, snow, hail, etc.? Not a chance.
The way commodities are priced and valued sits at the architectural centerpiece of what a commodity management system needs, and this impacts practically everything throughout the commodity supply chain. Unlike most manufacturing businesses where the price of goods is known throughout the supply chain, unpriced and partially priced positions cause core differences in the way a commodity is bought, sold, shipped, stored, invoiced, accounted for, and valued throughout the supply chain.
ERP solutions have a fundamental problem supporting this complication. With no defined price, how do you create a contract in an ERP system? And price types are of so many variations (unpriced, index, NPE, etc.) as are exchange types that provide creative market prices (hourly, daily, monthly, etc.). How do you handle provisional, prepayment, and final invoices? How do you handle mark-to-market valuations and constantly changing market prices?
Given the nature of the business, consider the need for extensive risk management that commodities companies have. I’m certain there are similarities with other businesses, but how deep does that really go? Let’s start with fundamentals – can we really comprehensively create a commodity contract in an ERP system incorporating all the different variations we encounter? Complaints from users who have tried this abound. And how easy do you think it is to get a 101 price exposure and position report from an ERP system? These are far targets, forget about other basic and advanced needs. Non-starter from my perspective.
Here’s the crux — You can apply bandages to plug every leak as it pops up but ultimately, without changing the core product architecture, the bandages can go only so far. And if you want to solve the core, you need to re-architect the part completely – either you do it by going through a heavy, long drawn out customization that you fund and maintain, or the vendor does it and risks the product stability and time to market, which will impact the growth of their core business, and therefore puts a question on intent and sustenance of a step in this direction. Something to really think about…
I think common sense and experience tells us to rely on fit for purpose solutions wherever available. When no option is readily available, I can understand the need to look at alternatives. Over the course of my commodity industry experience, I've witnessed the damage caused when commodities companies try to adapt ERP to fit their needs. Instead, commodities companies should use software specifically designed to manage the supply chains of the commodities they deal with.
Eka's Smart Commodity Management offering is a next-generation CTRM software solution that meets the operational and analytical needs of commodities companies and supports a wide range of commodities in the agricultural, manufacturing, metals, and energy industries. Commodity market participants use Eka's solutions for commodity specific analytics and for the management of commodity trading, raw material procurement, risk & compliance, and supply chain & operations.