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SAP Commodity Management, option for deal capture for SAP S/4HANA
Deal Capture application on SAP S/4HANA is comprehensive first of a kind trade to profit CTRM solution from SAP bringing front and back office operations through an integrated standard solution.
The deal capture solution integrates with below processes:
When a deal in deal capture is published, the system creates SAP sales or purchase contract depending on the deal. For instance, if a trader intends to sell crude, the system will create backend sales contract. Similarly, if trader intends to buy crude, the system will create backend purchasing contract.
This article will focus on integration of SAP Commodity Management, option for deal capture for SAP S/4HANA solution with SAP Commodity Risk Management for SAP S/4HANA.
To understand the importance of risk integration, a basic understanding of oil hedging might prove helpful.
For many businesses, fluctuating/volatile oil prices can enhance operational cost and risk. When the oil drops suddenly, it can bankrupt drillers. At the same time, if the oil price exponentially increases, can directly impact consumers. To mitigate such scenario, organization uses oil hedging strategies using futures. A hedge involves establishing a position in futures or options market that is equal and opposite to a position at a risk in physical market
In energy industry there are multiple futures contracts which are traded on an exchange (for instance New York Mercantile Exchange – NYMEX or IntercontinentalExchange - ICE). Below are 6 primary contracts:
So how does a company hedge using oil future? Let’s take an example where a refiner buys 950,000 BBL Crude Oil at May Calendar Month Average ICE Brent + a diff. Before the deal prices in, i.e. before May, the deal price is not fixed. During the pricing period in May, ICE Brent futures could be sold daily until the end of the month, when total financial position would be (950,000), while the physical position is 950,000. This hedge protects from price changes before the crude is sold or refined. If Brent prices move up $0.50, money is made on the appreciation of the physical asset but lost on the hedge. If Brent moves down, the asset depreciates but the financial increases in value. At consumption or sale of the physical barrel, the hedge is bought back/lifted, and the cycle is complete.
It is evident to receive timely & accurate information of negotiated physical trade to the risk or position keeper group in order to make play in the futures market.
SAP Commodity Management, option for deal capture for SAP S/4HANA comes with out of box capability to integrate with SAP Commodity Risk Management. Below information from deal capture is utilized in risk management (but not limited to):
As stated previously in the article, depending on the transaction, the system will create backend contracts. Based on volume, periodicity & effective dates on the deal, backend contract will generate quantity schedule (QS) or quantity plan (QP) on sales or purchase contract respectively.
Below is an example of purchase deal. As you can see from figure 1 (header details), the trader has negotiated a purchase spot deal with deal effective dates from April 1st – June 30th, 2020.
(Figure 1)
In figure 2, the product, volume, UOM & periodicity is specified (line item details). Based on the deal, the trader indicates purchase of 10,000 gallons per month of conventional reg 85 from April 1st – June 30th, 2020 (total of 30,000 gallons). Hence, the backend purchase contract will have 3 QP line items representing of trader’s intention which can be observed in figure 3.
(Figure 2)
(Figure 3)
Similarly, trader & strategy information is passed on the backend purchase contract as free characteristics as depicted in figure 4.
(Figure 4)
How does risk management group consume this information? When the QS or QP is created, the information related to volume and period is utilized to create “Risk Distribution Plan (RDP)” which is at line item level. Figure 5 illustrates RDP for above example:
(Figure 5)
The information from RDP is passed to table CMM_VLOGP along with the pricing data. From here, the data is curated to generate analytical reports as aid risk management office in making decision over hedging against physical (cash) market. I haven't gone over deal pricing and it's integration as it will warrant separate article in itself (which I intend to write up soon).
I hope you have found this helpful & might help you better understand why one integrated system (from trade to profit) with real time data will be quintessential for businesses to make faster and accurate decisions.
Thank You
Deal Capture application on SAP S/4HANA is comprehensive first of a kind trade to profit CTRM solution from SAP bringing front and back office operations through an integrated standard solution.
The deal capture solution integrates with below processes:
- SAP Trader's & Scheduler's Workbench (TSW) for scheduling of hydrocarbons
- SAP Commodity Risk Management for SAP S/4HANA
- SAP Commodity Pricing Engine
- SAP S/4HANA® Sales
- SAP S/4HANA® Sourcing and Procurement
- SAP Production and Revenue Accounting for Lease Management & Association
- SAP Credit Management
When a deal in deal capture is published, the system creates SAP sales or purchase contract depending on the deal. For instance, if a trader intends to sell crude, the system will create backend sales contract. Similarly, if trader intends to buy crude, the system will create backend purchasing contract.
This article will focus on integration of SAP Commodity Management, option for deal capture for SAP S/4HANA solution with SAP Commodity Risk Management for SAP S/4HANA.
To understand the importance of risk integration, a basic understanding of oil hedging might prove helpful.
For many businesses, fluctuating/volatile oil prices can enhance operational cost and risk. When the oil drops suddenly, it can bankrupt drillers. At the same time, if the oil price exponentially increases, can directly impact consumers. To mitigate such scenario, organization uses oil hedging strategies using futures. A hedge involves establishing a position in futures or options market that is equal and opposite to a position at a risk in physical market
In energy industry there are multiple futures contracts which are traded on an exchange (for instance New York Mercantile Exchange – NYMEX or IntercontinentalExchange - ICE). Below are 6 primary contracts:
- West Texas Intermediate – NYMEX
- Henry Hub Natural Gas – NYMEX
- NY Harbor Ultra-Low Sulphur Diesel – NYMEX
- RBOB – NYMEX
- Brent Crude Oil – ICE
- Gasoil – ICE
So how does a company hedge using oil future? Let’s take an example where a refiner buys 950,000 BBL Crude Oil at May Calendar Month Average ICE Brent + a diff. Before the deal prices in, i.e. before May, the deal price is not fixed. During the pricing period in May, ICE Brent futures could be sold daily until the end of the month, when total financial position would be (950,000), while the physical position is 950,000. This hedge protects from price changes before the crude is sold or refined. If Brent prices move up $0.50, money is made on the appreciation of the physical asset but lost on the hedge. If Brent moves down, the asset depreciates but the financial increases in value. At consumption or sale of the physical barrel, the hedge is bought back/lifted, and the cycle is complete.
| Position | Price Change over time | Profit/Loss Change over time | ||
| Physical Position | 950,000 | +$0.50 | Increase 475k | Net P/L: $0 |
| Financial Position | (950,000) | +$0.50 | Decrease 475k |
It is evident to receive timely & accurate information of negotiated physical trade to the risk or position keeper group in order to make play in the futures market.
SAP Commodity Management, option for deal capture for SAP S/4HANA comes with out of box capability to integrate with SAP Commodity Risk Management. Below information from deal capture is utilized in risk management (but not limited to):
- Trader
- Deal strategy
- Product
- Volume & unit of measure (UOM)
- Periodicity
- Effective dates
- Pricing
As stated previously in the article, depending on the transaction, the system will create backend contracts. Based on volume, periodicity & effective dates on the deal, backend contract will generate quantity schedule (QS) or quantity plan (QP) on sales or purchase contract respectively.
Below is an example of purchase deal. As you can see from figure 1 (header details), the trader has negotiated a purchase spot deal with deal effective dates from April 1st – June 30th, 2020.
(Figure 1)
In figure 2, the product, volume, UOM & periodicity is specified (line item details). Based on the deal, the trader indicates purchase of 10,000 gallons per month of conventional reg 85 from April 1st – June 30th, 2020 (total of 30,000 gallons). Hence, the backend purchase contract will have 3 QP line items representing of trader’s intention which can be observed in figure 3.
(Figure 2)
(Figure 3)
Similarly, trader & strategy information is passed on the backend purchase contract as free characteristics as depicted in figure 4.
(Figure 4)
How does risk management group consume this information? When the QS or QP is created, the information related to volume and period is utilized to create “Risk Distribution Plan (RDP)” which is at line item level. Figure 5 illustrates RDP for above example:
(Figure 5)
The information from RDP is passed to table CMM_VLOGP along with the pricing data. From here, the data is curated to generate analytical reports as aid risk management office in making decision over hedging against physical (cash) market. I haven't gone over deal pricing and it's integration as it will warrant separate article in itself (which I intend to write up soon).
I hope you have found this helpful & might help you better understand why one integrated system (from trade to profit) with real time data will be quintessential for businesses to make faster and accurate decisions.
Thank You
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