Use case: Characteristics vs Items – Using the Soy Market as an example
Supply and demand for commodities are traditionally only partially dependent on price. In mature market factors like the quality of a product, its origin, or a variety of other factors will determine whether a trade can be made. With CTRM4JDE this is solved by the use of so-called characteristics. This especially is the case for a product like Soy, where it can be used both for consumption by humans for a variety of food products, but also for biofuel. In this article, we will explain how to differentiate between an item and a characteristic by using the Soy market as an example.
Trading based on characteristics
The soy market is still growing quickly worldwide. Increased pressure on both livestock feed and human food consumption, while simultaneously increased pressure to reduce the use of oil-based fuels, has increased demand for soy heavily.
Quality aspects determine the use
Soy Quality aspects like protein percentage, oil percentage, and carbohydrate percentage determine its use for different kinds of livestock or even human consumption. A higher protein percentage will, for example, be used for chickens compared to pigs. These differences will create a determinant in price. A typical commodity trader would create the most optimal match between different kinds of protein to best accommodate its customers. These characteristics typically do not mean that one could not supply a higher kind of protein than asked, but normally would require a minimum quality level. As a higher protein level could normally mean a higher price, one would normally avoid this, but depending on market fluctuation this could be a profitable deal still. Having an accurate and full overview of these characteristics will allow a commodity trader to make better deals more quickly, with higher profitability.
Characteristics can also be used as indicators
Characteristics not always have to trigger different price rules. They can also be used to indicate different terms or clauses on a contract or invoice, or simply for logging information about a product. Flexibility in the use of this is crucial for an efficient trading and logistical operation. An example of this is whether the traded soy is organic, in this case, it would normally be a price differentiator. It would also mean in many countries that certification documentation needs to be provided as part of the contract.
Trading on Item or on Characteristics
In the Soy Market, a choice will always need to be made to what degree something is a differentiator. If it is a differentiator on price, it would normally be treated as a characteristic, but if a variable creates a different item altogether, this would be seen as a different market, especially where there are different worldwide Soy markets. The introduction of genetically modified organisms (GMO) has created a divide in the soy market. Genetically Modified (GMO) soybeans may never be traded with a request for non-GMO soybeans. This would therefore typically be a divided market entirely and be seen as a different product. This would therefore not be resolved using characteristics but would be an entirely different item. Every item normally consists of a different market. An overview of Non-GMO Soy should never be mixed with an overview of GMO Soy, as this would trigger significant liability risks.
Different products for different markets
One item can also be made into another item. An example within the soy market is the derivative Soy Protein Concentrate from Soybeans, this would be considered a different market entirely. These markets can behave differently and would be considered as different products. Also, this would, therefore, be solved by creating a separate item instead of using a characteristic. It could trigger trade or make decisions, as different items can become derivatives of the other. By having an integrated overview of both physical, future, and derivatives prices in one integrated system, one can create better trading decisions while doing this.
Items and Characteristics in CTRM4JDE
CTRM4JDE is ideally positioned for use in a commodity trading organization that also needs to allow for efficient logistical operation. Depending on the product and specific organization, a multitude of structures between items and characteristics can be chosen. A theoretical unlimited amount of characteristics can be chosen. Many can be filled automatically. The flip side of this increase in informatization could be an increased workload. This is a balance that needs to be determined per organization. It’s been proven crucial for many organizations to have the ability to allow for a multitude of characteristics to be flexible in its use, even varying per item.
Allocation of delivery lines
Where often contracts on both purchase and sales side consist of a variety of delivery lines, the determinant which purchase or sales delivery line will be matched and executed is often determined based on these characteristics. This process is in our system called allocation, where a trade or logistical employee allocates these lines to each other, triggering subsequent execution processes and documentation.
Overview with detailed insights
Goods on inventory are also displayed in the logistics position. This overview provides detailed insight into the amount, dates, locations, and all quality aspects belonging to that specific lot. From this overview, the trader or logistics employee can manage and assign lots for transportation to either a customer or a production facility.
In a simple overview as depicted above, one can see all purchase and sales lines for a specific period, with appropriate characteristics like type and origin included. By simply selecting them, a planner can generate a reservation (soft allocation) that can be executed. Everything with a red cross has been reserved, but can still be visible. Multiple purchase lines can be allocated to a sales delivery line, and purchase lines can be split automatically to fit sales delivery lines. This allows for a quick and integrated overview of allocation processes.
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Author: Mark Kamphuis
Business Unit Manager CTRM at Cadran Consultancy