Dear,
In the last blog we discussed how Capital Scarcity can hit very hard to Oil companies which are not ready to the challenges of this new scenario.
Today, we´ll look at some alternatives to improve the efficient management of Capital in Oil companies by combining the functionalities of SAP APO and SAP Bank Analyzer.
Some of the required functionalities are not available yet; current Bank Analyzer versions don´t have strong Market Risk Analyzers, including Value at Risk calculations. But these functionalities have been offered for years in SEM Banking (considered by many the precursor of Bank Analyzer), and in my opinion, it´s a matter of time that they´re included in Bank Analyzer.
Going back to the point, we saw in the previous blog that an Oil company with a very efficient Supply Chain can still face Capital tensions ending in bankruptcy due to the Oil Market Risk.
What can we do for improving the business plan including this risk?
First thing we must understand is that a Production Order or a Storage Unit of a Volatile product, like Oil, can be represented in Finance by a Financial Transaction (or Financial Instrument), whose underline is the Volatile product (Oil). With this integration, a potential Market Risk Analyzer engine of Bank Analyzer would be able of giving us the Expected Losses due to the Value at Risk of the Underline.
On the other hand, the company can hedge the potential Market Risk losses by selling the Oil to a customer. But then it will be exposed to potential losses due to Counterparty Risk.
Again, representing the Sales Order Items as Financial Transactions in Bank Analyzer, and providing the Rating of the Business Partner to the Credit Risk Engine, the system will give us the Expected Losses of the Financial Transaction (including the Expected Loss at committing with a Sales Order, by using Credit Conversion Factors).
By calculating the consumed Capital due to Market Risk Volatility and Credit Risk of the Exposures, Bank Analyzer will give us the Free Capital of the Company in every planning cycle.
As Free Capital is a measure of the Market and Credit Risks that the company can tolerate without suffering Solvency tensions, it´s actually determining a bottleneck in the amount of Oil that the company can extract, refine, store, distribute and sell.
Bottlenecks of the Supply Chain are represented in SAP APO by Resources and Capacities; and the Supply Network Planner will generate Planned and Production Orders only if the company has available capacity.
Making an analogy, in the same way that the Oil Company will not extract more Oil than its refining capacity, the company should not extract more Oil than the amount of Volatility that it can support without becoming insolvent. And in case the Oil can be sold immediately, hedging the Market Risk Volatility, it shouldn´t extract more oil than the amount whose Credit Risk Expected Loss is higher than the Company´s free Capital.
The standard APO element for modeling this "Free Capital-Capacity", would be an APO-Supply Network Planning bucket Resource.
Nevertheless, the available and consumed Capacity in this resource will be provided by an external engine, the Free Capital Calculator of Bank Analyzer.
Simplifying, in case Volatility and Counterparty Risk is low, Bank Analyzer will represent the situation with available Capacity in the bucket resource. On the contrary when Volatility and Credit Risk are high, Bank Analyzer will communicate less available Capacity to the bucket Resource.
The company has also to look Capital Consumed by its Market Demand on the Long Term Demand Planning activities, we´ll see how to model it in a future post.
Join the SAP Banking Group at: http://www.linkedin.com/e/gis/
Looking forward to read your opinions.
K. Regards,
Ferran.
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