ERP system vs. CTRM — Don’t ignore these 4 key differences
When it comes to commodity trading and risk management (CTRM), will using your existing enterprise resource planning (ERP) software suffice? That is true ‘risky business’! Think twice before using them interchangeably.
ERP as path of least resistance
Organizations spend time and resources in ERP deployment, training, and on-boarding. Therefore, they mistakenly consider a single ERP system to be the best course of action for performing commodity trading operations as well.
However, ERP systems were not designed with a focus on commodity trading. They are meant to manage costs, logistics and compliance related to physical materials. Conversely, CTRM systems are meant to manage risks involved in commodity trade. While pitting ERP system against CTRM, there are a few key contrasts that we can draw.
4 core differences between ERP and CTRM
1. Pricing variations
Trading in commodities comes with managing wildly swinging pricing dynamics that include currencies, exchanges, external market forces and more.
On one hand, volatility in commodity trading prices cannot be handled by ERP without introducing significant customizations, which are not yet foolproof. A CTRM system on the other, is designed to manage the dynamics of commodity pricing, namely, flexible pricing options that are necessary keeping in view the constant change in trade volumes, quality, delivery dates and other factors.
An ERP solution unfortunately is not designed to manage and mitigate potential trade risks resulting from pricing variation– a core purpose of CTRM systems.
2. Complicated contracts
Contracts for commodity and energy trades are complex when compared to fixed value physical contracts. Inevitably, market forces often necessitate frequent changes to these contracts, such as changing quantities or shipment modes. ERP systems cannot cope with these fluctuations and are more suited for handling contracts with highly fixed variables. CTRM systems are designed to manage contractual workflows in-line with the dynamics of trading and assimilate all fluctuations.
3. Hedging of trades
Hedge trades need to be accounted for and reported in sync with International Financial Reporting Standards IFRS-9 and IFRS-15. Core derivative capabilities are missing in ERP. Additionally, ERPs have limited scope to handle future-price contracts, long/short positions etc. Alternatively, CTRM systems are equipped to manage hedge portfolios, provide accurate valuations of commodity contracts, and support standard reporting frameworks.
4. Enable trading and risk management
The primary function of a CTRM system is to manage and mitigate risks involved in commodity trading. Unique risk management calculations such as Mark-to-market valuation, Value at Risk, Counter-party exposure, hedge and position reporting, are critical in trading and risk management. A comprehensive CTRM system helps reading risk exposures more accurately, allowing commodity businesses to gain a better understanding of their business, and this lets them take decisions that positively impact the bottom line.
In contrast, ERPs are suited for materials procured at a fixed price, fixed place, and fixed date. If there is volatility in any of these three factors, the existing ERP functionalities collapse under pressure. The cost of customization and uncertainty of outcome makes ERP an unreliable resource for the commodity and energy trading business.
If you are keeping score, it’s 0–4 in favor of CTRM systems! A commodity trading company analyzing ERP system vs. CTRM will find that CTRM system most suited for their commodities and asset classes. They should look for TRM solutions that are secured, easy to integrate and have robust reporting and analytical capabilities.
The Eka Digital Commodity Management Platform provides a suite of simple yet powerful apps that are pre-configured to let enterprises go live in weeks at a fraction of CTRM cost. Eka’s solutions enable enterprises to extend beyond trading and add intelligence from all aspects of the trading value chain.
Get in touch to know more about our CTRM offering.