Category Archives: Risk Management

The Risk of Being a MultiNational

A recent article over on ChiefExecutive.net for those who “want to be a multinational” did a great job of pointing out many of the risks that a company has to prepare for in order to become a multi-national. It zeroed in on the following seven risks:

  1. Country Risk
    Third parties from countries with less mature corporate governance laws/regulations are more likely to create a compliance breach for a multinational firm.
  2. Industry Risk
    Some industries are riskier than others. For example, food distribution — the risk of contaminants from unknown factories or partners with less rigorous quality control could be high and exposure you as the importer to massive liabilities and lawsuits. Defence is risky as well. Maybe only non-controlled components are being outsourced, but one accidentally exposed document can lead to very serious repercussions to the company and the executives, who could be held personally liable.
  3. Spend Exposure Risk
    If a single vendor accounts for 80% or more of a specific business unit spend and something happens to that vendor, negating the ability of the vendor to meet its commitment, the entire business unit is then at risk.
  4. Compliance Risk
    Failure to comply with import or governing regulations in the importing country from a product perspective can lead to entire shipments being size and destroyed. This is particularly bad in Europe where certain chemicals have been severely restricted or banned by RoHS, WEE, or similar EU directives. It’s also becoming a problem in North America, where substances such as BPA are finally being restricted or banned.
  5. Discovered Exposure Risk
    The supplier, who may not be corrupt today, may have been corrupt in the past — and the corruption could come to light during the time in which your organization is doing business with the supplier. This could be devastating as it could bring your firm under investigation.
  6. Partner Disruption Risk
    If the supplier is supplying a critical part or service, and is the only (significant) source of such product or service, it could jeopardize an entire product or service line and bring significant financial risk to organization as a whole, even if the spend on the supplier is less than 20%. (This risk is complementary to the Spend Exposure Risk.)
  7. Dependency Risk
    If the organization cannot function without the supplier, then each of the above risks that apply to the relationship increases substantially. The financial risk could escalate from significant financial loss to bankruptcy as significant supply chain failures, as chronicled in Supply Chain Digest’s 11 Worst Supply Chain Disasters, can bankrupt even a multi-billion dollar organization.

And it mentioned the following risk, which is buried under discovered exposure risk, that should probably be front and centre:

  • FCPA and Bribery Act Risk
    Your subsidiaries or partners could violate the US FCPA or UK Bribery Act in the course of doing normal business in the country in which they are operating. Although both acts allow for a form of facilitation payments, as that is just the way business is done in some parts of the world, there’s a difference between a facilitation payment and an outright bribe and, in some countries, while they still exist, facilitation payments are not as common as they used to be as they adjust to doing business with the West. (Of course, they find new ways to extract blood from your stone, but I will leave that discussion to a global trade expert.)More importantly, especially under the UK bribery act, even relatively inexpensive gifts — such as business dinners, sports tickets, or Christmas Party invitations — can be construed as bribes. Extra care has to be taken, especially if such gifts go to the winning party.

There can be great rewards to being a multinational that taps the opportunities in emerging markets from both a supply, and demand, perspective, but there are similarly great risks. Is your organization prepared? And more importantly, is your supply chain?

Should Your Contracts Be Based on Alternate Dispute Resolution?

The dispute resolution solution of choice in most large contracts is litigation — you reserve the right to tell the other party that I’ll Sue Ya if anything goes wrong. Given the large judgements that have been awarded in some of the more famous legal battles, it seems like it should be the dispute resolution of choice when millions of dollars are on the line. But should it really? The reality is that court is time consuming, costly, and, as all court cases are public domain, damaging to your reputation and irreparably harmful to your business relationship. All it does it take a bad situation and make it much, much worse.

There are other options, and, as described in this recent CPO agenda article on “taking the alternate route”, they include:

  • mediation,
  • arbitration, and
  • adjudication.

And your procurement organization should be acutely aware of them, because each and every contract signed needs a dispute resolution procedure — as it cannot be predicted when something will go (horribly) wrong and when the organization will have to deal with it quickly, and effectively. And as the article notes, if you do have a dispute and you don’t have adequate dispute resolution provision, it can make the resolution of the dispute significantly disadvantageous for one party or another, depending on the circumstances. And you don’t want to risk the resolution being disadvantageous to your organization, considering it is Supply Management’s job to be leaders in contract creation and negotiation.

So why consider ADR? As the author notes: the overriding advantage of using ADR is that it enables both parties to preserve the commercial relationship while maintaining control of resolving the dispute. So which ADR option do you choose? It depends on what you need.

  • Mediation
    is a method that may allow parties to reach an amicable agreement and maintain on-going relations. The focus of the process is on the interests of the parties, rather than on their legal rights alone, which allows other factors such as commercial pressures to be taken into account. If the goal is to reach a mutual settlement, this is often the best bet.
  • Arbitration
    is particularly valuable with international contracts where parties are based in different countries, since court judgments accepted in one country are difficult to enforce internationally. Arbitration awards are easily enforced all over the world under the New York Convention. If the goal is to reach an enforceable settlement, this is often the best bet.
  • Adjucation
    is hugely popular because it provides a quick answer and the resolver is likely to be a subject matter expert from the industry. And the answer, while not always the one sought, is usually one the parties can live with. This allows the parties to deal with the problem and move on. If the goal is to get a quick resolution, this is often the best bet.

And while the best option may not always be clear cut, chances are it won’t always be litigation. Keep this in mind when determining your dispute resolution methodology of choice.

Another Lesson In The Peril of Spreadsheets

A recent article in Supply and Demand Chain Executive on why you should NOT “Let This Happen To You” had some scary lessons on why spreadsheets should be tossed out of your operations management process forever and ever.

  • a high-volume software company unwittingly threw 20 Million annually into the scrap bin because of a hidden, devastating, logical spreadsheet error that systematically triggered over-ordering of seasonal printed materials
  • a financial services firm underestimated support centre demand by over 250 agents, roughly 25 percent of total demand because of formula errors and inappropriate assumptions
  • a national build-out of a digital service network was beset with months of delays and millions of dollars in lost revenue because spreadsheet-based material planning and execution tools were overwhelmed with the size and complexity of the job

And, as the article pointed out, management is usually unaware of the issues until crisis is upon the company. Spreadsheets might “get the job done” when a quick and dirty calculation is needed for an estimate, but calamities incubate when an application is extended to problems that are too large or complex and eventually significant error creeps in that could devastate your business.

This is especially true in Supply Management. As the author notes, the high-volume software company that lost 20 Million annually relied on spreadsheets that not only included forecasting information, but that extended all the way into the Procurement of materials. The authors neglected to include materials already on order as part of supply requirements. As a result, every time the spreadsheet was reviewed, another unnecessary buy was signalled.

And it’s true in Service Management. The financial services firm that underestimated support centre demand used a spreadsheet that assumed demand would stay constant with a major service platform roll-out.

For any calculation that goes beyond an initial estimate, the repeated use, alteration of, and reliance on spreadsheets quickly leads to manual error. And for any calculation that is large (in value) or complex, it isn’t long before a scenario arises where consequences and execution risk become very high — and costly.

So ditch the spreadsheets and put in place proper financial, enterprise planning, data analysis, and supply management tools. The corporate bank account will thank you.

Trade Partnership Programs: Are You Ready for Global Compliance?

Chances are that, if you are a US based organization, you are up to date on you C-TPAT (Customs-Trade Partnership Against Terrorism) and if you are a multi-national, your AEO (Authorised Economic Operators) initiatives to achieve a safer supply chain while streamlining trade through self-compliance security initatives (designed to withstand comprehensive audits). And while this may have been enough in the beginning, today the C-TPAT and AEO are just two of many global trade partnership initiatives that you should be aware of. If your organization is to be a major player in the global marketplace, you should be aware of at least the following seven initiatives:

  • AEO (EU)
    Authorized Economic Operator: AEO status is granted to reliable operators that are compliant with respect to security and safety standards and who can therefore be considered “secure” traders. Benefts include fast-tracked consignment, streamlined declarations, and mutual recognition with countries with a similar program.
  • C-TPAT (US)
    Customs Trade Partnership Against Terrorism: A voluntary supply chain security program focussed on securing supply chains against terrorism. Benefits include reduced customs inspection, reduced border delays, and eligibility for account-based operations.
  • Customs Co-operation and Mutual Administrative Assistance in Customs Matters
    An European Union program that provides the necessary tools for customs cooperation between EU member countries and other importers and exporters, including Korea, Canada, Hong Kong, the US, India, China and Japan.
  • FAST
    Free and Secure Trade: A voluntary joint initiative between the Canada Border Services Agency (CBSA) and U.S. Customs and Border Protection that enhances border and trade chain security while making cross-border commercial shipments simpler and subject to fewer delays.
  • ISA
    Importers Self Assessment Program: a voluntary approach to trade compliance that provides the opportunity for importers who have made a commitment of resources to assume responsibility for monitoring their own compliance in exchange for benefits.
  • SAFE Framework
    SAFE Framework of Standards to Secure and Facilitate Global Trade: a WCO Framework that includes requirements for Customs and Authorized Economic Operators that is designed to facilitate the implementation of secure trade programs in member nations
  • SEP
    Secure Export Partnership: A US-New Zealand Customs security arrangement (which is representative of emerging US security arrangements with other countries).

The Growing Importance of Water Conservation

Chances are, somewhere along the line, your supply chain requires freshwater — and lots of it. If it’s not already costing your organization a lot of money, it will soon. Why? Consider these facts, as collected in “Greenhouse Gas and Energy Co-Benefits of Water Conservation” by Carol Maas and Water for Energy by the World Energy Council.

  • 70% of the planet may be covered in water, but only 3.0% of that is freshwater, and five sixths of that is frozen in glaciers
  • 60% of freshwater is found in nine countries: Brazil, Russia, China, Canada, Indonesia, United States, India, Columbia, and the Democratic Republic of Congo
  • one third of the Earth’s population does not have the necessary quantity of 100 to 200 litres/day of water available to them
  • the US estimates that by 2050, half of the world’s population will live in nations short of water
  • over the last 70 years, water withdrawals have increased at more than twice the rate of population expansion
  • on average, 70% of available freshwater is used for agriculture and 22% is used by industry
  • water is required to produce energy
  • municipalities in Ontario consume more electricity than any industrial sector outside Pulp and Paper
  • water and wastewater services in Ontario municipalities represent a third to a half of electricity consumption – double that of street lighting
  • global water requirements for energy production are expected to increase from approximately 1.8 Billion cubic meters in 2005 to almost 2 Billion cubic meters in 2020 to about 2.1 Billion cubic meters in 2035
  • the increased need for energy production combined with increased agricultural needs and industrial process needs (to produce goods for an increasing population) is going to add considerable strain to an already strained water supply

The cost of water is going to increase as freshwater becomes more scarce, just as the cost of energy has increased with the cost of oil, which is still a primary fuel for electricity generation. As a result, water conservation is quickly becoming just as important to your supply chain as energy conservation, and any measures taken today will pay off in spades tomorrow.