Category Archives: Risk Management

Looking for Savings? Don’t Overlook Your Insurance Premiums!

A recent article in Industry week noted that when it comes to “insurance renewal, a 1-2-3 strategy can pay off”. Many decision makers may be tempted to compare corporate insurance renewal with personal insurance … where you get the bill and send a cheque, because you don’t really have much choice as changing (life, disability, health, illness, etc.) plans will undoubtably result in a cost increase and benefit reduction, as costs go up (while benefits go down) with age. But this is a bad comparison because corporate insurance plans don’t work like personal life / disability / health plans, rates change with demand and business conditions, and business conditions change all the time.

Business change may not only introduce the need for more insurance (such as when a company begins exporting its products overseas), but may also reduce the need for current coverage (when asset values decline). As the article points out, failing to recognize the impact of new business approaches, whether new strategies that increase risks or downsized operations that alter exposure levels, can cause a manufacturer to make the wrong decision on insurance coverage. And for a large company, this can cost it tens (or hundreds) of thousands of dollars annually (and millions if we’re talking employee group benefit plans). (There’s a reason there are consulting companies which specialize in insurance plan selection and negotiation.)

So what should you do? The article recommends the following 1-2-3 agenda:

  1. Coverage Type
    Examine company operations, compare them to what they were in the past, and accurately assess what needs to be covered. Where are the risks, and what will the recovery cost if they materialize?
  2. Coverage Limits
    How much is at risk and how much insurance is needed to cover it? If you have doubled the size of your shipments, then you might need double the transit insurance. But if you’ve moved to JIT inventory, you might be able to cut your warehouse insurance in half.
  3. Risk Management Services
    Examine a potential insurance provider’s capacity to deliver training, information about industry best practices and expert advice when an emergency makes quick action imperative before you enter into negotiations.

The only thing I’d add is a step 4: hire an expert. The few thousand a day it will cost for an external expert to evaluate your needs and negotiate a better deal could not only save you many times her fee, but prevent financial disaster should an emergency arise.

Supply Chain Challenges for 2009

Industry Week recently ran an article on the “top nine supply chain challenges for 2009”. Some were dead on. Some less so. But it got me thinking … what were the obvious challenges for 2009, and what were the challenges that were most likely to be overlooked.

The obvious challenges are getting their fair share of press.

  • Risk Mitigation
    Between risk of supplier financial failure; the volatility in the energy, commodity, and global financial markets; and the unpredictable nature of economic recoveries, every organization will have their hands full with risk mitigation this year.
  • Working Capital
    In a very short time-span, we’ve gone from a credit glut to a credit crunch, and chances are, unless you are among the small minority with flush bank accounts, you’re constantly facing working capital challenges.
  • Shorter Supply Chains
    Since you can no longer afford inventory, you have to move to a demand-driven pull-based model which requires a shorter supply chain to pull-off.
  • Renewed Focus on Safety
    After all of the recent salmonella, melamine, and lead-paint scares, there is a renewed focus on safety around the globe. You need to make sure your safety procedures and independent safety tests are in order, or risk massive fines and lawsuits.
  • Heightened Regulatory Compliance
    In response to the recent consumer product safety fiascos, many countries are stepping up import and export related requirements and introducing new documentary and testing procedures. Are you ready?

The most-likely-to-be-overlooked challenges, less so. But they’re just as important.

  • Technology Upgrades
    You have to do more with less, but your current, aging, software and hardware infrastructure won’t support it. You need new best-of-breed sourcing, procurement, trade, visibility, and analytic solutions as well as a new green infrastructure to run them. That costs money. And even though you can state case-study after case-study and customer success after customer success demonstrating the 2x to 5x ROI the upgrades will deliver, you’ll have trouble navigating the ridiculous obstacle course that the cost-focussed savings-blind CFO will force you through.
  • Sustainability
    Recession or not, the sustainability advocates are not going away. And neither is Generation Y. Since you have to redesign your supply chain anyway, you might as well make sustainability a core requirement.
  • Near Country Sourcing
    Shortening your supply chain is a good start, but you really need to find ways to take advantage of supply sources in your local geography if you truly want to win in the long term. LCCS regions come-and-go, but your neighbors will always be your neighbors. Find mutual opportunities for success and stick around for the long term.
  • Procurement Outsourcing
    Every procurement organization has functions and categories it does well, and functions and categories it does not. It needs to get a handle on the latter, figure out what needs to be done, and then outsource those functions and categories to a professional outsourcing firm that has the expertise to do those functions and categories well.
  • The Path to Procurement Mastery
    If you’ve been keeping up to date with the Hackett and Accenture research, not only do leaders do things different, but they structure their organizations different. In addition to adopting new technologies, methodologies, and supply chain structures, to truly overcome the supply chain challenges of 2009, you’ll have to restructure your organization and intersecting business processes as well. Change management is always a challenge.

10+2 Is In Effect. Are Your Trade Programs Ready?

The requirements of the Importer Security Filing, 10+2, took effect on January 26. The clock is now ticking, and there are only eleven months left in the CBP informed compliance period to achieve full compliance before full enforcement and (significant) monetary penalties take effect.

Under the Importer Security Filing initiative, the electronic transmission of 10 data elements from an importer (or its freight forwarder), and 2 from the vessel, must be executed no later than 24 hours prior to the loading of cargo onto a vessel destined for the US, shifting data transmission to an earlier stage of the supply chain distribution process.

If a company does not comply, it can be fined a minimum of $5,000 for each violation. If you do a lot of importing, that will add up fast.

Are you in compliance? Are you sure? If you don’t have good trade visibility, and don’t verify the 10+2 submissions filed (on your behalf by your freight forwarder and broker), you might not be … and you won’t know it without good trade visibility. Moreover, you might be risking other non-compliance losses. For more insight, check out the latest Sourcing Innovation Illumination on Why You Need Trade Visibility.

Six Ways Companies Mismanage (Supply Chain) Risk

A recent Harvard Business Review article by Rene M. Stulz dives into “six ways companies mismanage risk” (membership required) that are just as applicable to supply chain operations as they are to financial operations. As the article points out, these missteps are just as likely to occur in good economic times as they are in the rough economic times we are currently experiencing, but rough times will magnify the impact of the mistakes considerably.

The six mistakes highlighted in the article are:

  • reyling on historical data
    Historical data is a starting point, not a destination. For example, look at how well real estate investment managers who assessed risk on the basics of statistics over the past three decades did in 2007. Closer to home, consider how well you would have done in your fuel hedges in early 2008 (before the price of oil dropped over 60%) or with your logistics hedges in late 2007 (before global shipping volumes were cut in half).
  • focussing on narrow measures
    Focussing only on-time deliveries misses the point. It’s about the perfect order — the right product of the right quality shipped using the right method with the right carrier at the right price delivered to the right customer at the right time. If you ship the wrong product, or the quality is insufficient, or you have to expedite it and it costs three times as much, you’re losing money and your metric will never capture the losses.
  • overlooking knowable risks
    Meticulous review and careful thought allows one to identify almost every possible risk, including risks in the instruments used to measure the risk. For example, if you are using an index to hedge against cost increases, and that index lags reality by three months, you could be cut off-guard by rapid cost increases or decreases due to unexpected supply or demand disruptions (caused by natural disasters, for example).
  • overlooking concealed risks
    Risk takers in your organization may deliberately hide risks that they feel are unlikely, and jeopardize an entire sourcing plan or production line. For example, if you’re in food, and your supply manager decides to source all of your tomato crop from coastal Florida because of volume-based cost savings, you’re at risk of an immediate supply disruption every time a hurricane sweeps up the cost.
  • failing to communicate
    If you can’t clearly explain the risks in your plan, systems, and organization, chances are they’ll be ignored, or at least severely underestimated. For example, if you’re assuming uninterrupted supply from a single-source supplier, and that risk goes overlooked, that could be a real problem in this economy.
  • not managing in real time
    Unless you’ve been hiding under a rock in a cave, you’ve probably noticed the volatility of the global markets lately, including supply volatility (as suppliers go out of business) and demand volatility (as customers reduce their spending).

All these mistakes will cost your dearly in the current economic climate, so its worthwhile reviewing your risk management strategy to make sure you haven’t made any of them. For more information on risk management, and best practices, see the risk management posts here on Sourcing Innovation.

Is Your Legal Team Ready (for Supply Chain Litigation)?

A recent CFO article on The Next Wave did a great job of pointing out that litigation is likely to spike again this year, starting next quarter. Noting that recession-related litigation last spiked in 2001 when the dot-com bubble burst, the wounds of recession often encounter a particularly painful form of salt as corporate attorneys stand ready to pour it on if they sense weakness in a rival, or a way to compensate for their own economic woes. Legal wrangling is already erupting across the board as aggrieved plaintiffs battle over breached labor contracts, unwarranted (executive) layoffs, dubious financial disclosures, broken supply chains, ailing strategic partnerships, ravaged 401(k) plans, unjust competitive practices, intellectual-property infringements, and curtailed credit lines. And as the article notes, that’s only a starting list.

Furthermore, the experts are expecting an avalanche in legal activity, starting as early as next quarter, with electronic discovery, intellectual property rights, anti-trust initiatives, and foreign corrupt practices leading the way, even though large companies are already spending millions a year on litigation. (In 2007, one in five large U.S. companies spent $10 Million or more on litigation, and the number of smaller companies spending more than $1 Million on litigation increased threefold.) As such, companies should expect their rivals to dust off their patents, pull out all the stops against perceived monopolies and their acquisition activity (under the “anti-trust” umbrella), report them on any practice that could be considered a foreign corrupt practice (in hopes that a resultant fine will bankrupt them), and challenge any e-discovery initiative as violating client-attorney privilege.

So what can you do to mitigate the risk?

  • Legal Team Readiness
    Make sure your legal team is primed and ready for unexpected, unwarranted, and ill-conceived litigation. They should be fully staffed; up-to-date on corporate policies, practices, and promotions; and supported by legal experts and support firms already on retainer.
  • Patent Perception
    Make sure that your legal team is well versed in the patents owned by your competitors and the usual patent trolls in your industry and that preliminary arguments as to why they don’t apply and / or why they are invalid (proof of prior art) are already drafted. In addition, they should be ready with counter-arguments as to potential violations of your patents by your competitors. Sometimes, nothing quashes a patent suit faster than the threat of a valid counter-suit.
  • Acquisition Acuity
    Avoid any acquisitions not already under way that could be seen as contributing to a monopoly, and insure that you have lots of facts, figures, and expert opinions ready to go as to why your current merger and acquisition plans will not result in a monopoly. If you do your homework, you just might be able to get the case thrown out before it ever gets to trial.
  • Practice Proofing
    Make sure your legal team has an expert (on retainer) on the laws with each country you are doing business with as well as the foreign corrupt practices act, alien tort claims act, and other laws that could be used to bring charges against your firm on home soil. Have that expert review all of your proposed dealings before any contracts are signed, before any money changes hand, and before any new operations are initiatied.
  • e-Discovery Deftness
    Have your legal and IT teams do a thorough review of the e-Discovery service(s) that you plan to use and insure that their processes are sufficient to prevent disclosure of attorney-client privileged information at least 99.999% of the time. (If you expect that from your SaaS offerings, you should expect it from your e-Discovery offerings! There’s no way that 800 documents should slip through in a batch of only 78,000, as that’s an error rate of 1.02%.) After all, every attorney-client privileged document that slips through is a piece of key evidence that you could be denied.
  • Quality Quest
    If you’re linked to a salmonella, melamine, or other food safety scandal in any way, shape, or form, you’re pretty much guaranteed to be a defendant in a class-action lawsuit these days. Your only defense (against criminal / federal action) is to prove that you exceeded every federal regulation and quality standard and were methodical and religious in your quality testing.
  • Security Strafing
    With the recent changes to the IEEPA that increase the civil penalty for a “person to violate, attempt to violate, or cause a[n export] violation to “an amount not to exceed the greater
    of (1) $250,000; or (2) an amount that is twice the amount of the transaction that is the basis of the violation    “, the introduction of 10+2 where an importer importers can be charged with fines equal to the shipment value if they fail to
    file and face charges of $5,000 per transaction with missing or inaccurate data    , and an increasing number of customs audits (especially against those companies without a solid C-TPAT history), it’s only a matter of time before your weak links are discovered … and if those weak links including non-compliance with one or more regulations, you could be risking a multi-million dollar fine. Do a security compliance audit before the fact, and if you find any discrepancies, voluntarily report them (under the guidance of external legal council) immediately.