In our study, the leaders significantly outperformed the followers in In our experience and research, too often commodity

oo often commodity managers

this area. Leaders have set up incentive systems to facilitate com-
modity manager decisions. Metrics are established relative to the
overall market instead of historic prices or budgets. The followers
typically view commodities as a purchased product like other direct
and indirect materials and develop commodity strategy without
alignment to corporate strategy.
Deloitte Consulting LLP
Commodity price volatility may be here to stay – at least for the
foreseeable future – but better commodity management can allow
a company to outperform the market, minimize earnings surprises,
and support a competitive advantage.
adopt the view that there is no reason to share practices because
their commodity (e.g., coffee beans) is so vastly different from
another commodity (e.g., resin). And, it is true that these markets
are very different. However, the decision variables tend to be the
same, which is a very important point. All commodity managers
that experience unforeseen volatility are concerned with price,
availability, quality, timing of buys, contract and spot mix, cross
hedging tactics, etc. It is also increasingly important in agricultural
commodities to understand cross-commodity dynamics. The “food
for fuel” trend is driving significant changes in farmers’ decision
making processes and speculator’s involvement in commodity trad-

Effective Commodity Management: So what are the leaders doing? It is clear that effective commodity
management is more than a procurement challenge today.
ing. Until recently, the only correlation across agricultural commodi-
ties was the seasonal impact of weather. Today, a farmer’s decision
to convert soy crops to corn crops to take advantage of increasing

A Source of Competitive Advantage

A framework for better commodity management
focus on ethanol can have a significant impact on strategies across
Over time and through experience, Deloitte Consulting has devel- agricultural commodities.
oped a “leading practice” framework for managing commodities
(see below). This framework has three main sections: When studied, it becomes apparent that two types of knowledge
are important: Knowledge of the particular commodity market and
Some companies do a better job than others in protecting their Because of these pressures, nearly every boardroom presentation • Strategy development knowledge of commodity management practices. Further, Centers
margins from the ups and downs of commodity markets. Effective now has a section on commodity price volatility, the annualized • Strategy execution of Excellence better allow commodity management practices to be
commodity management can be a source of competitive advantage impact to the company, and the actions the company is taking to
• Enablers shared by transferring this knowledge.
— it can lower the average procurement cost, reduce the impact of offset that impact. But there are only a certain number of tactical
price volatility on earnings, and consequently increase shareholder changes available toFigure
offset 1. There is a volatility.
commodity strong correlation between
At some point, the performance Key takeaways
value. options run out andrelative to the market and maturity in commodity
more dramatic changes need to occur. Figure 2. Deloitte Commodity Management Framework Those companies with more advanced commodity management
management practices
strategies perform better financially. Specifically, these leaders would
Deloitte Consulting LLP (Deloitte Consulting) initiated a commod- To understand whether there were relatively betterManagement
Commodity methods ofSurvey Results
have better, more stable, and more consistent earnings over time.
ity management study to answer two questions — how much has managing commodity volatility, we correlated each company’s
30% of com-
these companies reported
They would be viewed more positively by the investing community,
commodity volatility impacted businesses and which commodity modity management practices to reported earnings surprises and earnings surprises 1
negative Strategy Development Commodity
“Knowing what to do” Strategy peers, competitors, and supply chain partners. What we have found
management practices truly support a competitive advantage. More performance relative to the commodity markets. 85%
No negative • Alignment to in this survey highlights the significant opportunities for companies
than 40 companies participating across multiple manufacturing and earning surprises 1 corporate strategy
The results % of to improve their commodity strategies and capabilities.
consumer industries have yielded some very telling insights. 15%
• Price forecasting
• 15 percent of theRespondents
companies surveyed (the leaders) report no
Leaders Price Risk Companies can take advantage of the leaders approach to manag-
Our study shows that companies with effective commodity manage- earnings surprises from volatility in commodity
Recorded markets. Further,
strong commodity Recorded weak commodity Management Management
ing risk, developing forward price models, commodity management
ment practices outperform the commodity markets and have a these companies reported outperforming
managementthe commodity markets
practices management practices • Contract • Contract
Strategy Execution management management processes and aligning skill sets, and the organization to create
higher likelihood of not reporting earnings surprises or warnings. almost 70 percent of the time. “Doing it right” • Financial • Financial
investments investments competitive advantages. As commodity markets and prices increas-
Solid strategies are effective in both inflationary and deflationary • Of the remaining companiesPerform/
(the followers), 30 Exceed
percent had Exceed
Underperform 67% 23% Supply Chain Integration ingly impact earnings, these improvement opportunities are becom-
markets. earnings surprises and 71 percent
33% reported either taking market • Commodity driven sales • Repositioning sourcing ing more vital to the competitiveness of an organization.
and marketing in the value chain
There are three fundamental keys to effective commodity manage- pricing or underperforming
% of relative to the market. • Product strategy • Supply continuity
Respondents For more Information
ment: Perform/
Underperform Enablers Sanjay Agarwal
• A tailored mix of strategies and tools to manage commodities; Figure 1. There is a strong correlation between performance
71% • Organization – center of • Risk and contract
relative to the market and maturity in commodity Figure 2. Deloitte Commodity
excellence
Management Framework
management systems Principal, Deloitte Consulting LLP
• A good forward view of commodity prices; and management practices Performance Relative to Commodity Markets 2 203.905.2762
• A category management organizational structure that supports Commodity
1 Based
Management
on earnings Survey
releases from the Q1Results
2005 to Q1 2007 s1agarwal@deloitte.com
cross commodity and cross-functional collaboration and risk man- 2 Performance Relative to Commodity Markets was self-assessed by respondents Strategy development (“knowing what to do”)
30%LLP’s
Source: Deloitte Consulting of these companiesPrice
2007 Commodity reported
Volatility Survey Tom Marriott
agement. negative earnings surprises 1 Commodity strategy should be tied to business strategy. In other
Strategy Development Commodity Principal, Deloitte Consulting LLP
85% “Knowing what towords,
do” the success criteria measured and tied to a commodity
Strategy
A Case for Change No negative strategy should also be to
• Alignment tied to the company’s business strategy. Too 908.673.5340
Commodity volatility is a fact of life. Unpredictable swings in agri- earning surprises 1 corporate strategy tmarriott@deloitte.com
% of
15%
often, this turns outforecasting
• Price to not be the case. Instead, commodity strate-
cultural and petroleum-based stocks have tormented buyers and Respondents
gies are generally tied to too few or too many criteria and these cri-
Leaders Price Risk Adam Mussomeli
traders for as long as commodities have been procured for some Recorded strong commodity Recorded weak commodity teria areManagement
often not in line with or updated to match the company’s
Management
Principal, Deloitte Consulting LLP
form of production. But it is getting worse. Increased demand for management practices management practices • Contract
business strategy. • Contract
Strategy Execution management management 203.905.2646
energy and the development of biofuels, among other drivers, have “Doing it right” • Financial • Financial
Strategy execution (“doing
investments investmentsit right”) amussomeli@deloitte.com
increased both price volatility and driven average prices upwards Perform/ Exceed Exceed
over the past five years. Right now, there is every reason to expect Underperform 67% 23% Once strategy is set, there are a number of ways a commodity
Supply Chain Integration
To access the full report, please visit www.deloitte.com/us/
33% • Commodity driven sales • Repositioning sourcing
this trend to continue. In our survey, about 60 percent of respon- manager can implementinthe
and marketing the strategy
value chainto manage the commodity or, consumerproducts.
% of •said
Product
dents reported that high volatility (30 percent and up) is impacting Respondents differently, optimize• Supply
strategy continuity
availability and price. Commodity manag-
more than 30 percent of their spend. And, more than 35 percent of Perform/ ers and companies optimize buying through price management, risk
Enablers About Deloitte
Underperform
respondents reported annual price changes greater than 30 percent 71% • management,
Organization
excellence
and better• supply
– center of chain integration.
Risk and contract
management systems
Deloitte refers to one or more of Deloitte Touche Tohmatsu, a Swiss Verein, its member firms, and their
respective subsidiaries and affiliates. As a Swiss Verein (association), neither Deloitte Touche Tohmatsu
over each of the last three years. Performance Relative to Commodity Markets 2
Enablers nor any of its member firms has any liability for each other’s acts or omissions. Each of the member firms
is a separate and independent legal entity operating under the names “Deloitte,” “Deloitte & Touche,”
Because raw material costs cannot be transferred quickly and ef- 1 Based on earnings releases from the Q1 2005 to Q1 2007 Organizationally, the leaders have implemented commodity “centers “Deloitte Touche Tohmatsu,” or other related names. Services are provided by the member firms or their
2 Performance Relative to Commodity Markets was self-assessed by respondents subsidiaries or affiliates and not by the Deloitte Touche Tohmatsu Verein.
ficiently down the value chain, volatility is leading to weaker, more Source: Deloitte Consulting LLP’s 2007 Commodity Price Volatility Survey
of excellence” in addition to a commodity manager structure. They Deloitte & Touche USA LLP is the U.S. member firm of Deloitte Touche Tohmatsu. In the United States,
unpredictable earnings, and depressed share prices – witness the find that this center of expertise greatly facilitates best practice and services are provided by the subsidiaries of Deloitte & Touche USA LLP (Deloitte & Touche LLP, Deloitte
Consulting LLP, Deloitte Financial Advisory Services LLP, Deloitte Tax LLP, and their subsidiaries), and not by
rising incidence over the past two years of companies that have market information sharing across different commodities. Deloitte & Touche USA LLP.
Member of
missed the earnings targets they provide to investors and analysts. Copyright © 2007 Deloitte Development LLC. All rights reserved. Deloitte Touch Tohmatsu

16 F O U R T H Q U A R T E R / M I D - W I N T E R 2 0 0 7 - 0 8 F O U R T H Q U A R T E R / M I D - W I N T E R 2 0 0 7 - 0 8 17
 In our study, the leaders significantly outperformed the followers in
this area. Leaders have set up incentive systems to facilitate com-
modity manager decisions. Metrics are established relative to the
overall market instead of historic prices or budgets. The followers
typically view commodities as a purchased product like other direct
and indirect materials and develop commodity strategy without
alignment to corporate strategy.
Deloitte Consulting LLP
Commodity price volatility may be here to stay – at least for the
foreseeable future – but better commodity management can allow
a company to outperform the market, minimize earnings surprises,
and support a competitive advantage.
In our experience and research, too often commodity managers
adopt the view that there is no reason to share practices because
their commodity (e.g., coffee beans) is so vastly different from
another commodity (e.g., resin). And, it is true that these markets
are very different. However, the decision variables tend to be the
same, which is a very important point. All commodity managers
that experience unforeseen volatility are concerned with price,
availability, quality, timing of buys, contract and spot mix, cross
hedging tactics, etc. It is also increasingly important in agricultural
commodities to understand cross-commodity dynamics. The “food
for fuel” trend is driving significant changes in farmers’ decision
making processes and speculator’s involvement in commodity trad-

Effective Commodity Management: So what are the leaders doing? It is clear that effective commodity
management is more than a procurement challenge today.
ing. Until recently, the only correlation across agricultural commodi-
ties was the seasonal impact of weather. Today, a farmer’s decision
to convert soy crops to corn crops to take advantage of increasing

A Source of Competitive Advantage

A framework for better commodity management
focus on ethanol can have a significant impact on strategies across
Over time and through experience, Deloitte Consulting has devel- agricultural commodities.
oped a “leading practice” framework for managing commodities
(see below). This framework has three main sections: When studied, it becomes apparent that two types of knowledge
are important: Knowledge of the particular commodity market and
Some companies do a better job than others in protecting their Because of these pressures, nearly every boardroom presentation • Strategy development knowledge of commodity management practices. Further, Centers
margins from the ups and downs of commodity markets. Effective now has a section on commodity price volatility, the annualized • Strategy execution of Excellence better allow commodity management practices to be
commodity management can be a source of competitive advantage impact to the company, and the actions the company is taking to
• Enablers shared by transferring this knowledge.
— it can lower the average procurement cost, reduce the impact of offset that impact. But there are only a certain number of tactical
price volatility on earnings, and consequently increase shareholder changes available toFigure
offset 1. There is a volatility.
commodity strong correlation between
At some point, the performance Key takeaways
value. options run out andrelative to the market and maturity in commodity
more dramatic changes need to occur. Figure 2. Deloitte Commodity Management Framework Those companies with more advanced commodity management
management practices
strategies perform better financially. Specifically, these leaders would
Deloitte Consulting LLP (Deloitte Consulting) initiated a commod- To understand whether there were relatively betterManagement
Commodity methods ofSurvey Results
have better, more stable, and more consistent earnings over time.
ity management study to answer two questions — how much has managing commodity volatility, we correlated each company’s
30% of com-
these companies reported
They would be viewed more positively by the investing community,
commodity volatility impacted businesses and which commodity modity management practices to reported earnings surprises and earnings surprises 1
negative Strategy Development Commodity
“Knowing what to do” Strategy peers, competitors, and supply chain partners. What we have found
management practices truly support a competitive advantage. More performance relative to the commodity markets. 85%
No negative • Alignment to in this survey highlights the significant opportunities for companies
than 40 companies participating across multiple manufacturing and earning surprises 1 corporate strategy
The results % of to improve their commodity strategies and capabilities.
consumer industries have yielded some very telling insights. 15%
• Price forecasting
• 15 percent of theRespondents
companies surveyed (the leaders) report no
Leaders Price Risk Companies can take advantage of the leaders approach to manag-
Our study shows that companies with effective commodity manage- earnings surprises from volatility in commodity
Recorded markets. Further,
strong commodity Recorded weak commodity Management Management
ing risk, developing forward price models, commodity management
ment practices outperform the commodity markets and have a these companies reported outperforming
managementthe commodity markets
practices management practices • Contract • Contract
Strategy Execution management management processes and aligning skill sets, and the organization to create
higher likelihood of not reporting earnings surprises or warnings. almost 70 percent of the time. “Doing it right” • Financial • Financial
investments investments competitive advantages. As commodity markets and prices increas-
Solid strategies are effective in both inflationary and deflationary • Of the remaining companiesPerform/
(the followers), 30 Exceed
percent had Exceed
Underperform 67% 23% Supply Chain Integration ingly impact earnings, these improvement opportunities are becom-
markets. earnings surprises and 71 percent
33% reported either taking market • Commodity driven sales • Repositioning sourcing ing more vital to the competitiveness of an organization.
and marketing in the value chain
There are three fundamental keys to effective commodity manage- pricing or underperforming
% of relative to the market. • Product strategy • Supply continuity
Respondents For more Information
ment: Perform/
Underperform Enablers Sanjay Agarwal
• A tailored mix of strategies and tools to manage commodities; Figure 1. There is a strong correlation between performance
71% • Organization – center of • Risk and contract
relative to the market and maturity in commodity Figure 2. Deloitte Commodity
excellence
Management Framework
management systems Principal, Deloitte Consulting LLP
• A good forward view of commodity prices; and management practices Performance Relative to Commodity Markets 2 203.905.2762
• A category management organizational structure that supports Commodity
1 Based
Management
on earnings Survey
releases from the Q1Results
2005 to Q1 2007 s1agarwal@deloitte.com
cross commodity and cross-functional collaboration and risk man- 2 Performance Relative to Commodity Markets was self-assessed by respondents Strategy development (“knowing what to do”)
30%LLP’s
Source: Deloitte Consulting of these companiesPrice
2007 Commodity reported
Volatility Survey Tom Marriott
agement. negative earnings surprises 1 Commodity strategy should be tied to business strategy. In other
Strategy Development Commodity Principal, Deloitte Consulting LLP
85% “Knowing what towords,
do” the success criteria measured and tied to a commodity
Strategy
A Case for Change No negative strategy should also be to
• Alignment tied to the company’s business strategy. Too 908.673.5340
Commodity volatility is a fact of life. Unpredictable swings in agri- earning surprises 1 corporate strategy tmarriott@deloitte.com
% of
15%
often, this turns outforecasting
• Price to not be the case. Instead, commodity strate-
cultural and petroleum-based stocks have tormented buyers and Respondents
gies are generally tied to too few or too many criteria and these cri-
Leaders Price Risk Adam Mussomeli
traders for as long as commodities have been procured for some Recorded strong commodity Recorded weak commodity teria areManagement
often not in line with or updated to match the company’s
Management
Principal, Deloitte Consulting LLP
form of production. But it is getting worse. Increased demand for management practices management practices • Contract
business strategy. • Contract
Strategy Execution management management 203.905.2646
energy and the development of biofuels, among other drivers, have “Doing it right” • Financial • Financial
Strategy execution (“doing
investments investmentsit right”) amussomeli@deloitte.com
increased both price volatility and driven average prices upwards Perform/ Exceed Exceed
over the past five years. Right now, there is every reason to expect Underperform 67% 23% Once strategy is set, there are a number of ways a commodity
Supply Chain Integration
To access the full report, please visit www.deloitte.com/us/
33% • Commodity driven sales • Repositioning sourcing
this trend to continue. In our survey, about 60 percent of respon- manager can implementinthe
and marketing the strategy
value chainto manage the commodity or, consumerproducts.
% of •said
Product
dents reported that high volatility (30 percent and up) is impacting Respondents differently, optimize• Supply
strategy continuity
availability and price. Commodity manag-
more than 30 percent of their spend. And, more than 35 percent of Perform/ ers and companies optimize buying through price management, risk
Enablers About Deloitte
Underperform
respondents reported annual price changes greater than 30 percent 71% • management,
Organization
excellence
and better• supply
– center of chain integration.
Risk and contract
management systems
Deloitte refers to one or more of Deloitte Touche Tohmatsu, a Swiss Verein, its member firms, and their
respective subsidiaries and affiliates. As a Swiss Verein (association), neither Deloitte Touche Tohmatsu
over each of the last three years. Performance Relative to Commodity Markets 2
Enablers nor any of its member firms has any liability for each other’s acts or omissions. Each of the member firms
is a separate and independent legal entity operating under the names “Deloitte,” “Deloitte & Touche,”
Because raw material costs cannot be transferred quickly and ef- 1 Based on earnings releases from the Q1 2005 to Q1 2007 Organizationally, the leaders have implemented commodity “centers “Deloitte Touche Tohmatsu,” or other related names. Services are provided by the member firms or their
2 Performance Relative to Commodity Markets was self-assessed by respondents subsidiaries or affiliates and not by the Deloitte Touche Tohmatsu Verein.
ficiently down the value chain, volatility is leading to weaker, more Source: Deloitte Consulting LLP’s 2007 Commodity Price Volatility Survey
of excellence” in addition to a commodity manager structure. They Deloitte & Touche USA LLP is the U.S. member firm of Deloitte Touche Tohmatsu. In the United States,
unpredictable earnings, and depressed share prices – witness the find that this center of expertise greatly facilitates best practice and services are provided by the subsidiaries of Deloitte & Touche USA LLP (Deloitte & Touche LLP, Deloitte
Consulting LLP, Deloitte Financial Advisory Services LLP, Deloitte Tax LLP, and their subsidiaries), and not by
rising incidence over the past two years of companies that have market information sharing across different commodities. Deloitte & Touche USA LLP.
Member of
missed the earnings targets they provide to investors and analysts. Copyright © 2007 Deloitte Development LLC. All rights reserved. Deloitte Touch Tohmatsu

16 F O U R T H Q U A R T E R / M I D - W I N T E R 2 0 0 7 - 0 8 F O U R T H Q U A R T E R / M I D - W I N T E R 2 0 0 7 - 0 8 17