Category Archives: Risk Management

Are You Ready for the Black Swan?

As recent events have shown us again and again, he’s coming. You better be ready. This means you have to stop worrying about death by a thousand white swan-bites, because, having dealt with the flock day-in and day-out, you know how to deal with them. Their bites might hurt a bit, but you know that you’ve gotten quite good at sterilizing and bandaging the wound so that it heals fast, because you wouldn’t still be around had you not. However, you aren’t (as) familiar with the black swan yet. You are unaccustomed to the poison that accompanies his bite and, chances are, you aren’t stocking the antidote to treat it. This is problematic because the venom is fast acting, and if you don’t treat it in time, it can kill you.

Just because the appearance of the black swan is a fourth quadrant extreme event which cannot be statistically predicted, doesn’t mean that you can’t plan for it. That’s what real risk management is all about. True risk management is all about figuring out where the black swan could appear, what type of damage it could do, and how you will contain the damage and clean up the mess before it spreads beyond your control (and bankrupts your company).

It’s identifying those things that everyone thinks can’t go wrong, but that can, in actuality, go extremely wrong if an extreme event occurs. Like an unexpected market crash, an earthquake in a low-risk area destroying a factory, or an uprising closing a border. And then it’s having damage prevention or containment plans (with necessary equipment and resources ready to go) to deal with a sudden loss of supply, extreme market volatility in the preferred currency markets, or a lack of containment when an earthquake or explosion causes chemicals to start leaking rapidly. Because just like an overinflated balloon will eventually explode with the pressure, so will anything else we keep pumping money or resources into with expectations of a perpetual performance or growth. As nature has shown us, everything breaks down eventually. Even mountains crumble. And it doesn’t necessarily take a deluge to wash away your supply chain, and your company with it. So get ready for the black swan, and maybe you’ll be the one to survive his bite.

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The Most Overlooked Risk in Your Energy Supply Chain Just Got Worse!

And I’m still not talking about volcanic eruptions — which could bury or clog your production facilities with ash, a terrorist attack — which could blow up a pipeline, or plain old management incompetence — which could result in a poorly maintained drilling station blowing up, but suicidal Sciurus Carolinensis, who, over the past few months, has knocked out substations in Ohio and Florida (NWF Daily News).

Now it seems that these organized little critters have figured out that they can’t always do it themselves and have recruited procyon lotor to help with those “well-protected” substations that need some extra muscle. A few days ago, in Memphis (WSVN.com), an acrobatic and mean-spirited raccoon climbed over more than 30 feet of barriers to short-curcuit a switch on a substation and knock out power to 8,000 customers, including two hospitals the newspaper, for over five hours.

It would appear that things are getting dangerous over the hedge now that squirrels and raccoons are working together. If you’re not ready, your energy supply chain could be next!

 

Partners in Terror

 

Another Reason to Use Plain English in Your Contracts

In addition to the fact that you will have an entire state on your side, as Dick Locke points out, and the fact that not using plain english can land you in some dire consequences, as Tim Cummins points out over on “Commitment Matters”, there is the fact that obscure language increases the risk of failure. If no one understands what they are meant to be doing, a dispute is more likely. Contracts need to be clear, so write them in plain English.

By The Time You Detect Financial Risk …

… it’s too late. As per this article on “the quality and performance connection” of supply risk, indicators of financial risk are usually preceded by a slow decline in quality or performance that is difficult to detect from delivery to delivery as suppliers, looking to survive, begin to cut corners that they hope will go unnoticed but which often compound the farther up the supply chain you go.

As the author, Jim Lawton of D&B notes, you need to consider supplier performance metrics to be the best leading indicator of overall supplier financial viability. This means that you need to define a process to monitor quality and performance from a risk perspective. Do this by:

  • identifying which areas of supply where quality, performance, and/or financial risk factors are likely to be most pronounced;
  • defining a way to track and measure performance using delivery, performance, and other system data;
  • aggregating the data regularly for analysis;
  • creating corrective action plans to be implemented as soon as elevated risk is development; and
  • creating a closed-loop process that continually monitors and assesses risk information to insure that risks are detected early enough to permit the corrective action plans to be undertaken successfully.

And maybe you won’t be the one that finds out about an impending supplier bankruptcy after it’s too late!

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Plain English Contracts Can Be Reasonable

Last year, Dick Locke, who has an entire state on his side, wrote a great post on the importance of plain English in contracts. Then, last month, with the help of The Temp Life (Season 2, Episode 7), I made it very clear what might happen if you don’t follow his advice.

But one aspect of contracts we haven’t tackled yet is that of “reasonableness”. As highlighted in this recent article over on SupplyManagement.com which asks you to “now be reasonable”, these clauses can end up causing more disputes than they ultimately resolve. While they are included in the hopes of raising contentious issues during critical phases of contract negotiations, they simply delay the inevitable because, given enough time, a supply disruption will happen and finger pointing will begin.

The key to preventing disputes is to define precisely what conditions define a breach and what steps each party will take to try and remedy it, in plain English, so there are no disagreements down the line. While it’s true that a contract cannot predict, or define a remedy for, every type of disruption that could happen, it can predict, and define actions for, the most likely disruptions. The use of plain English to define reasonable remedies for these disruptions will prevent problems down the line. This will minimize the chance that the “catch-all” reasonableness clause will need to be invoked, but even if the “catch-all” clause does need to be invoked, if the reconciliation process is defined in plain English (notify, meet, accept, correct, etc.), things will still go smoother than if plain English is not used.

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