Dear,
The current financial and economic crisis has many manifestations; capital markets volatility, unemployment, social unrest...
They all are effects of the crisis but none of them is the cause of the crisis; as this crisis represents the exhaustion of an economic model, based on growing as much as possible, without considering the capital consumed in the process.
Today Capital has become scarce, making capital optimization the main priority.
Volatility of the commodities price is an interesting example; we've been said that Oil price is falling as a consequence of the Shale Oil revolution. But if we look at the price of other commodities like Gold, Platinum, Silver or Palladium we'll see that their prices have also fallen dramatically in the last moths.
Capital consumed in the commodities production and trading, manifests itself as Value at Risk, or in other words with the Volatility of the commodities price.
Today, many commodities traders, Oil, Gas and Mining companies are suffering financial difficulties and stopping strategic plans, as a consequence of the losses (capital consumed) they had in the last months.
According to the Wood Mackenzie consultancy group, $200 billion of investment have been delayed as a consequence of the drop in oil prices.
http://www.bloomberg.com/news/articles/2015-07-27/oil-majors-delay-200-billion-of-spending-wood-mackenzie-says
Has anybody thought how much capital has been wasted as a consequence of that?
Executives of those companies must learn the lesson, and take decisions putting Capital Optimization at the center of the strategic and tactical plans.
Some weeks ago, we discussed how to optimize the capital consumed in investment activities with SAP Bank Analyzer.
https://www.linkedin.com/pulse/capital-optimization-investment-activities-sap-bank-frances-gil?trk=mp-reader-card
In a future post, we'll see how to integrate Capital Optimization in the analysis of strategic decisions.
But today we'll look at the impact of inefficient capital management in the tactical planning of an Oil and Gas company.
Let's look at a simplified representation of the Supply Chain of an Oil company; extraction, refinement and distribution. Every step of the value chain represents a potential bottleneck, with a critical resource that needs to be managed in order of managing efficiently the Value Chain.
For instance, it would be inefficient extracting more Oil than the company's refinement capability. In the same way it would be inefficient refining more Oil than what the company can store or distribute.
Efficient management of the Supply Chain requires a holistic optimization of all the logistic resources, looking at all the bottlenecks of the Supply Chain.
But the recent crisis has made clear that this approach is incomplete, as it optimizes the logistic resources but it does not look at other bottlenecks which are critical in the new economic model.
If we look at the balance sheet of an Oil company we'll see that an important part of its Assets are the inventory of Oil stored, refined and distributed.
And remember that Volatility on the price of Oil increases the capital consumed due to Value at Risk, reducing the company solvency.
The higher the assets price volatility, the higher the capital consumed.
The company can hedge the market risk of the Oil price volatility by selling the Oil. Every Sales Order Item represents a Forward Contract, hedging the risk of the Oil price volatility; and at the same time, it also represents a Credit Risk exposure, that consumes the company’s capital.
Finally, if a company consumes more capital than it has, it becomes insolvent, very risky situation that many Oil companies are facing today.
Consequently we have to include Financial Capital in the Optimization of the Supply Chain, we'll see how to do it in the next post.
Join the SAP Banking Group at: http://www.linkedin.com/e/gis/92860
Looking forward to read your opinions.
K. Regards,
Ferran.
The current financial and economic crisis has many manifestations; capital markets volatility, unemployment, social unrest...
They all are effects of the crisis but none of them is the cause of the crisis; as this crisis represents the exhaustion of an economic model, based on growing as much as possible, without considering the capital consumed in the process.
Today Capital has become scarce, making capital optimization the main priority.
Volatility of the commodities price is an interesting example; we've been said that Oil price is falling as a consequence of the Shale Oil revolution. But if we look at the price of other commodities like Gold, Platinum, Silver or Palladium we'll see that their prices have also fallen dramatically in the last moths.
Capital consumed in the commodities production and trading, manifests itself as Value at Risk, or in other words with the Volatility of the commodities price.
Today, many commodities traders, Oil, Gas and Mining companies are suffering financial difficulties and stopping strategic plans, as a consequence of the losses (capital consumed) they had in the last months.
According to the Wood Mackenzie consultancy group, $200 billion of investment have been delayed as a consequence of the drop in oil prices.
http://www.bloomberg.com/news/articles/2015-07-27/oil-majors-delay-200-billion-of-spending-wood-mackenzie-says
Has anybody thought how much capital has been wasted as a consequence of that?
Executives of those companies must learn the lesson, and take decisions putting Capital Optimization at the center of the strategic and tactical plans.
Some weeks ago, we discussed how to optimize the capital consumed in investment activities with SAP Bank Analyzer.
https://www.linkedin.com/pulse/capital-optimization-investment-activities-sap-bank-frances-gil?trk=mp-reader-card
In a future post, we'll see how to integrate Capital Optimization in the analysis of strategic decisions.
But today we'll look at the impact of inefficient capital management in the tactical planning of an Oil and Gas company.
Let's look at a simplified representation of the Supply Chain of an Oil company; extraction, refinement and distribution. Every step of the value chain represents a potential bottleneck, with a critical resource that needs to be managed in order of managing efficiently the Value Chain.
For instance, it would be inefficient extracting more Oil than the company's refinement capability. In the same way it would be inefficient refining more Oil than what the company can store or distribute.
Efficient management of the Supply Chain requires a holistic optimization of all the logistic resources, looking at all the bottlenecks of the Supply Chain.
But the recent crisis has made clear that this approach is incomplete, as it optimizes the logistic resources but it does not look at other bottlenecks which are critical in the new economic model.
If we look at the balance sheet of an Oil company we'll see that an important part of its Assets are the inventory of Oil stored, refined and distributed.
And remember that Volatility on the price of Oil increases the capital consumed due to Value at Risk, reducing the company solvency.
The higher the assets price volatility, the higher the capital consumed.
The company can hedge the market risk of the Oil price volatility by selling the Oil. Every Sales Order Item represents a Forward Contract, hedging the risk of the Oil price volatility; and at the same time, it also represents a Credit Risk exposure, that consumes the company’s capital.
Finally, if a company consumes more capital than it has, it becomes insolvent, very risky situation that many Oil companies are facing today.
Consequently we have to include Financial Capital in the Optimization of the Supply Chain, we'll see how to do it in the next post.
Join the SAP Banking Group at: http://www.linkedin.com/e/gis/92860
Looking forward to read your opinions.
K. Regards,
Ferran.
1 comment:
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