TRIPLE POINT TECHNOLOGY, INC. | TPT.COM

TRIPLE POINT SOLuTION BRIEf

Commodity Management for Automotive Manufacturers and Suppliers

COMMODITY XLManage volatilty. Reduce Risk. PReseRve MaRgins. ensuRe coMPliance.

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Overview

For over seventeen years, Triple Point Technology has deployed systems to the world’s most successful global commodity houses and energy companies, enabling them to proactively manage the physical and financial buying, selling, logistics, accounting and risk management of multiple commodities on an integrated platform. More recently, faced with fundamental changes in the metals, chemicals, plastics and energy market environment, a new set of global organi-zations — Automotive Manufacturers and Suppliers — are recognizing how these same systems can help manage raw material risk and preserve profit margins in the face of today’s unprecedented commodity volatility.

BuSineSS PrOBleM: unPreCedented MArgin PreSSureS due tO riSing COMMOdity PriCeS & vOlAtility

The focus for supply chain groups over the last 15+ years has been on efficiency and speed. Manufacturing and supply chain techniques such as — Just in Time (JIT) inventory management, Total Quality Management (TQM), Six Sigma and Demand Driven Supply Network (DDSN) — were intro-duced to eliminate waste, reduce inventory and improve quality. These efforts have led to a striking reduction in buffer inventories to bare minimum levels. In addition, these leaner supply chains have become more global as organiza-tions look for lower cost suppliers and new markets to sell product. On one hand, this has reduced costs and opened new markets but on the other hand it has significantly limited the ability of businesses to handle unforeseen shocks to the system such as sharp raw material volatility.

the new-nOrMAl – vOlAtility, vOlAtility, vOlAtility

These lean, global supply chains are now faced with unprecedented commodity volatility and old strategies such as building inventory when prices are low for use when prices rise are dated and not realistic. Profit margins — and the executives charged with preserving them — are coming under fire like never before. In the past, commodity price increases were typically associated with supply-side crises and were relatively localized and temporary. Power short-ages in China lead to cuts in aluminum production. Pipeline disruptions in the Middle East or Nigeria lead to short-term oil supply outages. But today, in addition to supply-side disruptions caused by geopolitical events, commodity price increases and volatility are linked to several longer term demand-side trends such as the rapid growth of non-OECD countries that have a seemingly insatiable requirement for all raw materials. Analysts generally agree this demand-side growth is here to stay for the foreseeable future. With a tight supply/demand equation, the slightest alteration in either demand or supply brings wild swings in commodity prices — welcome to the new-normal.

Supply chain risks

Rising energy costs

Rising transportation costs

Commodity price and volatility

Intellectual property infringement

Supplier product quality failures

Lower consumer spending

Supply failure

Rising labor costs

Regulatory compliance

Internal product quality failures

Supply chain security breaches

IT risks

Immature physical infrastructure in offshore countries

Shortage in managerial talent

Natural disasters

45%

50%

42%

38%

37%

36%

34%

33%

26%

26%

26%

22%

19%

18%

15%

11%

Source: AMR Research, 2008

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Volatility obviously brings risk especially for organizations not used to running day-to-day operations in the midst of such rapid fluctuations in prices. But volatility also brings opportu-nity; there is a reason traders desire volatility – it provides the opportunity to outperform other traders and to make money. The manufacturers that embrace the “new-normal” and put the processes and systems in place to better manage volatility and risk will out perform competitors. The effectiveness of risk management will be a huge differentiator going forward.

A new era of solutions that use risk management techniques adopted from the energy and commodity trading industries and applied to the automotive industry are the next break-through in supply chain management.

SOlutiOn: PrOfitABly MAnAge COMMOdity PrOCureMent

To preserve margins, Industrial Manufacturers must move quickly to approach commodity procurement differently — and more proactively — than ever before. While not tradition-ally viewed as commodity trading organizations, automotive companies can now learn from leading commodity houses

and adopt new risk management processes, tools and measurements required to optimize raw material acquisition — all while ensuring compliance with the regulatory demands and hedge accounting requirements of SOX, FAS 133 (FAS 161), FAS 157, IAS 39, IFRS 7 and others.

Many industrial manufacturing organizations still acquire commodities in much the same way they procure non- commodity supplies. The same processes used to purchase office supplies are employed to procure metals, plastics and other commodity/energy inputs to the manufacturing process.

Without the processes, tools and measurements employed by today’s leading commodities traders and risk managers, the typical procurement function is not equipped with the real-time transparency, business intelligence, analysis tools, market data and position reporting required to make the most profit-able, cost-efficient decisions around commodity coverage and procurement, such as:

• Should I source commodities at a fixed price at time of purchase?

• Do I lock in 100% coverage or buy some percent of commodities in the spot market?

• Should I buy more than is required for the current cycle and store the surplus?

• What percent of coverage should be from long-term contracts?

• What is the commodity price risk in each case? The market risk? The counterparty credit risk?

• Can I factor freight rate risk into my commodity decisions?

• When and how should I use financial derivatives — such as futures, options and swaps — to hedge against volatility and inflation around future commodity purchases?

• Do I qualify for hedge accounting status — and what are the requirements?

• Do I have the tools for FAS 157 compliance?

Increasing commodity price volatility

1970 1980 1990 2000 20090

50

100

150

200

250

300

350

400

Source: US Bureau of Labor Statistics, Price Producer Index of selected commodities—January 1970 through February 2009; Accenture analysis

Steel Mill Products

Metals and Metal Products

Pulp, paper, and Allied Products

Chemicals and Allied products

Crude Petroleum (Domestic Production)

Industrial Electric Power

“ Automotive companies end products often contain tens or hundreds of base commodities in various and often unknown quantities. As such, these businesses have a highly complicated procurement portfolio, with varying levels of commodities in the make up of a variety of products. Having the information and tools to expose the risks and the talent to manage the complex web of risks offers a distinctive competitive advantage.” — Taking Control in the New Era of Price Volatility, Accenture.

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COMMOdity Xl – the AutOMOtive induStry SOlutiOn Suite

ProcurementCommodity XL is the leading commodity and enterprise risk management solution for procurement and other functions to balance between profi table purchasing, coverage requirements, supply chain movements, risk management policies and accounting regulations in today’s volatile and complex environment.

integrated demand PlanningCommodity XL Strategic Planning and Procurement™ (SPP) manages, measures, analyzes and reports supply coverage against the demand plan at both roll-up and granular levels.

Price risk ManagementCommodity XL provides the price risk management tools that are critical for the effective and effi cient sourcing and hedging of commodities in volatile markets.

Supplier risk ManagementCommodity XL for Supplier Management proactively measures, manages and mitigates the risk arising from supplier default and addresses the entire supplier risk process with a full range of analysis tools.

hedge AccountingCommodity XL for Hedge Accounting manages the daunting set of requirements under hedge accounting regulations including detailed testing, documentation and reporting that must be performed in order to qualify for hedge accounting status and it ensures full compliance with fAS 133 (including fAS 161 disclosures), IAS 39 and similar national hedge accounting regulations.

fair value disclosureCommodity XL for fair Value Disclosure provides the tools and framework to defi ne, measure and manage fair value levels and meet all disclosure requirements for fAS 157 and IfRS 7 compliance.

Currently, the typical procurement function within an automotive organization does not have real-time access to information or the solutions to answer these questions and manage the associated risk. But by taking the lead from their commodity/energy peers, they can follow a time-tested, market-proven path to more profi tably manage the commodity acquisition process — regardless of the volatile market environment around them.

COMMOdity Xl – the AutOMOtive induStry SOlutiOn

Procurement

Commodity XL™ is the leading commodity and enterprise risk management solution that balances between profi table pur-chasing, coverage requirements, supply chain movements, risk management policies and accounting regulations in today’s volatile and complex environment. With Commodity XL in place as the commodity management platform, the procurement function not only has the tools to ensure coverage and deliver the material when manufacturing needs

Ford Motor Company CFO, Lewis Booth, told reporters “we’ll be doing our best to wash out commodity price increases with those structural cost savings Ford has put in place.”

— Automotive News, 2010

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Management delivers the information to make risk adjusted decisions, utilize best practice methods for reducing supplier risk exposure and improve internal and external transparency. In the volatile commodity and energy markets, proactive supplier risk and exposure management are powerful weapons to help companies anticipate excessive exposure and supplier instability, rather than react to them. Triple Point’s Commodity XL for Supplier Management proactively measures, manages and mitigates the risk arising from supplier default and addresses the entire supplier risk process with a full range of analysis tools.

hedge Accounting

Commodity XL for Hedge Accounting™ supports a compre-hensive risk management program that enables fi rms to balance optimal economic benefi t, risk management and stable fi nancial statements. FAS 133 (FAS 161), and IAS 39 help alleviate the problem of derivatives used for hedging purposes causing large fl uctuations in earnings. Hedge accounting recognizes the offsetting effects between the derivative and underlying commodity, allowing an organiza-tion to recognize the net profi t or loss at the same time. This ensures that when the underlying commodity impacts earnings, so does the derivative. Commodity XL for Hedge Accounting manages the daunting set of requirements under hedge accounting regulations including detailed testing, documentation and reporting that must be performed in order to qualify for hedge accounting status. It ensures full compliance with FAS 133 (FAS 161), IAS 39 and similar national hedge accounting regulations.

it, but also now has the analysis and risk management functionality to determine the most profi table scenarios over when to buy, whether to store and whether to hedge using fi nancial derivatives such as futures, options and swaps. The measure of success would now include the mark-to-market P&L, as well as the ability to deliver on time. Commodity XL lets Automotive leaders actively manage the buying, coverage, position reporting, hedging, risk management and regulatory compliance for commodity procurement.

integrated demand Planning

Commodity XL Strategic Planning and Procurement™ (SPP) manages, measures, analyzes and reports supply coverage against the demand plan at both roll-up and granular levels. The SPP solution includes analysis for all physical assets such as commodities, plants, storage facilities and warehouses to name a few, and has the fl exibility to manage different calendar and budget periods. Time-period defi nition is fl exible to support an organization’s requirements for longer dated periods like annual to monthly, weekly and daily granularity. As plans change to refl ect market conditions, SPP provides the capability to “look back” and under-stand changes and drivers from version to version.

Price risk Management

Commodity XL provides the price risk manage-ment tools that are critical for the effective and effi cient sourcing and hedging of commodities in volatile markets. Commodity XL has the functionality and processes to ensure leadership-issued limits and controls are disseminated and enforced. Commodity XL delivers both the tools to measure risk such as VaR (value-at-risk) and the means to perform analysis of P&L changes caused by market movements under normal and alternative scenarios. Commodity XL helps companies gain business intelligence for better decision making and proper oversight, in addition to precisely managing and mitigating risk, and measuring and evaluating performance. With Commodity XL, Industrial Manufacturers can employ the most effective forward purchasing, trading and hedging practices that keep procurement costs down — and preserve margins.

Supplier risk Management

Commodity XL for Supplier Management™ provides a real-time, integrated process for effi cient and accurate supplier analysis and decisions. Latency is removed from the work fl ow so conclusions are neither delayed nor based on incomplete data. Additionally, Commodity XL for Supplier

SPP enables you to capture amounts or per-unit prices with forecasted quantities

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fair value disclosure

Commodity XL for Fair Value Disclosure™ is a comprehensive module for FAS 157 and IFRS 7 compliance. It provides the tools and framework to define, measure and manage fair value levels and meet all disclosure requirements. Commodity XL for Fair Value Disclosure ensures the proper checks and balances, consistency of methods and auditabil-ity in the assignment of levels and the disclosure of “mark-to-model” assumptions and valuations. FAS 157 and IFRS 7 force organizations to derive market prices for multiple types of assets and liabilities. The regulation requires companies to measure and disclose the “mark-to-model” techniques and worth of hard-to-value instruments. Commodity XL for Fair Value Disclosure provides the consistency and comparability of fair value measurements for stakeholders to confidently do business with your organization.

Architecture

The sophisticated, next-generation Commodity XL platform is built on Triple Point’s n-tiered, Java EE compliant, Web-enabled, highly flexible and scalable technology architecture. It offers super-fast processing that allows real-time valua-tion and position reporting for large transaction volumes. It provides concurrency across hundreds of users, Internet deployability, customizable desktops and reporting and open access via platform independence and native XML messaging. It quickly integrates with any operating system, application server, middleware or database.

Conclusion

Commodities, raw material and energy inputs are now a much larger and more volatile part of a company’s cost structure. Therefore, while not traditionally viewed as commodity companies, Industrial Manufacturers must approach commodity procurement differently — and more proactively — than ever before. Commodity XL, the most advanced and comprehensive commodity management system, provides Industrial Manufacturers with the trading, hedging and risk management tools and practices employed by today’s leading commodity and energy trading houses.

ABOut triPle POint teChnOlOgy, inC.

Triple Point is the leading global provider of innovative software solutions to efficiently and profitably manage commodities and enterprise risk. Triple Point’s growing, loyal customer base of over 260 companies represent all indus-tries with exposure to energy and raw materials including oil and gas, coal, metals, agriculture, transportation, shipping, consumer products (CP), discrete manufacturers, and big box retailers. The company was named a ‘Leader’ in Gartner’s ETRM Magic Quadrant for its completeness of vision and ability to execute. Triple Point offers the only real-time solution to manage market/price, counterparty credit, operational, and regulatory risk on a tightly integrated platform. Founded in 1993 and headquartered in Westport, CT, USA, Triple Point employs over 600 people in 11 offices and support centers around the globe. www.tpt.com.

how to get Started

To learn more about how Triple Point’s revolutionary Commodity XL software solutions provide Industrial Manufacturers the market-lead solution for hedging systems and multi-market commodity and enterprise risk management, please contact us at:

Triple Point Technology, Inc. Global Headquarters 301 Riverside Avenue Westport, CT 06880 USA

Tel: +1.203.291.7979 Fax: +1.203.291.7977 Web: www.tpt.com Email: info@tpt.com

“ Without the processes, tools and measurements employed by today’s leading commodities traders and risk managers, the typical procurement function is not equipped with the real-time transparency, business intelligence, analysis tools, market data and position reporting required to make the most profitable, cost-efficient decisions around commodity coverage and procurement.”