“Finance provides daily business support for the management of commodities”
The Laminazione Sottile group has been a European leader in the production of aluminium products for almost 100 years. Comprising an integrated value chain of 5 enterprises with sales of 240M, 60% of which exported, the group is currently experiencing strong geographical expansion. There are countless applications for the group’s aluminium products, ranging from food packaging to the engineering industry, from air conditioners to the nautical sector, and from construction to the automotive industry. Vertical integration encompasses all processes, from foundries to the rolling of sheet metal.
Today we talk to Enzo Russo, CFO of the Laminazione Sottile group, about how the finance function supports the business by managing commodity-price and exchange-rate risks.
What are the main challenges for a sector such as yours, with such a strong dependence on one commodity?
Anyone can buy aluminium, but the difference lies in its processing and the lead times for deliveries. The main challenge in our sector is currently the increased production capacity of our Chinese and Turkish competitors.
The challenge is therefore how to lower fixed costs and the solution is growth, both geographically and in the range of applications. In this regard, our vertical integration is fundamental, as is the flexibility of our production. In addition, Laminazione Sottile has expanded by acquiring several firms and invests heavily in both the improvement of manufacturing technology and the acquisition of additional market share. For example, we are now penetrating strongly the automotive sector, since the use of aluminium reduces vehicle weight.
Competition is also tackled by optimising processes in order to improve delivery lead times. In fact, we have been able to lower them by a full two weeks, with respect to the sector average, by implementing Quintiq for the planning and scheduling of production. Our extreme flexibility and investment in expansion represent major competitive advantages in this industry.
In the final analysis, growth helps to lower transformation costs and to become more competitive and flexible. In short, we are in a virtuous upward spiral.
How do you manage the fluctuating dollar prices for aluminium in combination with the fluctuations in the US dollar?
Importantly, it must be said that commodity prices are extremely transparent. All the aluminium in the world is listed on the London Metal Exchange and everyone, customers included, knows the price of the commodity when the contract is struck. This makes it possible to manage the price risk: we only buy aluminium ingots when a sale is confirmed, avoiding any form of speculation or exposure to purchase price risk. Given that both product delivery and payment take place months later, we obviously protect our margins by hedging all sales using forward contracts arranged abroad in GBP, USD and AUD.
On the procurement front, we have no EURUSD exposure because we use Reuters quotes to purchase in EUR.
What finance-related projects have you successfully pursued, or are you pursuing, that provide direct support for the business?
Firstly, specifically due to the fluctuating prices of the commodity, aluminium, that represents our raw material, financial management always works closely with business management. Truly on a constant and continuing basis. Whenever sales wants to complete a sale, the finance department sets the pricing parameters, amounts and latest deadlines for the contract, based on the credit score of the customer.
In this case, finance is not an ancillary function, but absolutely a complementary and integral part of the business.
Further, again in support of the business, I should mention – in the context of a major project to centralise functions within the parent company – that the centralisation of the finance department at group level has resulted in the standardisation of processes by area: accounting, treasury, management control, tax/M&A.
In fact, our finance department is re-engineering all functions and processes via the implementation of technological solutions. We are investing heavily for the healthy implementation of Industry 4.0.
Examples: automated recording of invoices via OCR recognition, software that reads a powerful database (Cerved Information) for the credit scoring of customers based on their financial indicators, consistent ERP throughout the group, cash pooling.
So, technology makes the difference when implementing process optimisation strategies in the finance area and, consequently, for the business as a whole.
For us, technology is always at the service of man and never a replacement for humans. That said, yes: technology is clearly fundamental, enabling us to save as much as 70% of the time previously invested in activities with low value added, with fewer manual errors.
The impact of technology on financial processes has also accelerated processes in other departments (for example, pricing, credit scoring and management control). Here too, we are in a virtuous upward spiral.
In the final analysis, technology for us means the standardisation of processes, with an increased ability to control both them and the group as a whole.