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Two Preventable Perils: Dangerous Driving and Unmonitored Price Risk

A fast drive, a twisty road on a slippery day and a fogged up windshield do not make a good combination. In fact, it’s an outstanding way to generate an undesirable convergence between your car and a telephone pole. No intelligent driver would do it…would they? Yet when it comes to price risk this is exactly what many industrial commodity processors do and many times it takes a big price move (said telephone pole) for the company to realize that such a risk exists at all! Our clients will tell you that we perpetually expound on the criticality of creating visibility for this risk, it’s just like pressing the defog button. For companies that are really serious about doing this, we’ve rarely seen so powerful a weapon as a price risk dashboard.

There are compelling reasons why raising the visibility of price risk is of particular concern to industrial processors. Firstly, commodity price risk is often a “derivative”, the product of the interaction between seemingly the unrelated activities of purchasing, production, sales and logistics. The consequences of their combination can be buried so it is important that decision makers can quickly see the impact of decisions that cause misalignment. As a range of staff right down to the front line make these impactful day-to-day decisions, it means that risk visibility is essential through the organization. Secondly, price risk management of industrial companies is often a part time activity. Competing responsibilities and priorities assure that middle management and line staff will be inattentive at times and expensive errors will be made. Dashboards are a great medium to elevate awareness at the times it is needed.

Obviously one dashboard cannot serve multiple levels of management – nor should it. But across the board, effective dashboards should have “effortless relevance”. Effortlessness is achieved by avoiding complexity. Multi-faceted graphics and intricate tables may look good but they demand expenditure of both time and focused effort from the user that undermines dashboard utility. Relevance is achieved through information that aligns to audience needs. Executive dashboards must deliver insight into effectiveness and perils (eg VAR, stress testing), middle management’s must measure conformance to risk tolerance, monitor control and project cash needs (eg coverage vs exposure, conformance to limits, margin use and projected cash flow) while line management need to be on top of physical pricing, daily position management requirements and conformance to limits.

Implementing dashboard capability no longer needs to be an arduous in-house development challenge either. Today’s CTRM (commodity trade risk management) system providers have come a long way in recent years with their development of sophisticated visualization tools. They increasingly offer degrees of user-control that can be used to adapt a dashboard to an evolving business, and can be as real time as your reporting. And if you’re already committed to a legacy ERP or accounting based system, CTRM systems are more compatible than ever and can hook onto a wide variety of platforms. Whatever your situation, dashboards are an excellent way to extract the full value from your system(s) by elevating their relevance.

But, and there’s always a “but”, the biggest challenge to worthwhile dashboard implementation isn’t technological, it’s managerial. A clear vision of what your price risk activity must achieve is needed as are clear definitions of the key factors that office and line management must follow, not things that are always evident when a price risk program is new. Your system provider can’t necessarily do this for you as in all probability there is essential uniqueness to your business that must be reflected in your indicators. But the more thought you expend here, the greater the payback and, if you don’t know where to start, help is only a phone call away. If you’re just putting a price risk program in place, you’ll see reduced learning time and rapid acceleration of better decision making. If you have a price risk program that needs upgrading, investment here will bring improved employee alignment and greater control, all of which will assure a positive return from your dashboard decision. Avoiding late reactions to telephone poles won’t hurt either.

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