Monthly Archives: January 2012

Risk Mitigation 2012: Economic

In our last post, we covered some potential mitigations for each of the top three geopolitical risks that we identified in our Risk 2011 series. In this post, we are going to cover some potential mitigations for each of the top three economic risks as we continue our series of posts inspired by the World Economic Forum‘s recently released 6th annual Global Risks report, 2011 edition.

03: Asset Price Collapse

Most of an organization’s capital is tied up in two things — its people and its assets. This includes its buildings, its inventory, and the raw materials that will be used to create future inventory. If all of a sudden the value of each of these assets drops 50% over night, the organization loses 50% of the value of these assets — and will likely sustain additional losses when it has to sell its inventory at a deep discount.

While asset price collapses can’t be prevented if a market is flooded, or a market is cornered, or asset prices are artificially inflated by collusion and then drop rapidly when the inflation cannot be maintained, it is often the case that impending asset price collapse can be predicted in advance. Asset prices rise and fall, and they always fall if they get to high. While the exact time, and degree, of collapse cannot always be predicted accurately, it’s often possible to predict an approximate time of collapse, and an approximate degree. If a price collapse is coming, the organization can reduce buys to minimal levels, sell off unnecessary assets in a controlled manner, or, if possible, hold onto them until such time as asset prices return to reasonable levels.

02: Extreme Energy Price Volatility

Today’s organizations are ultimately dependent upon three things – people, raw materials, and the energy required to transform the raw materials into the product the organization will sell. If oil doubles in price, that could make the difference between being able to produce the goods in China and import them into the US for sale at a profit and having to import them into the US for sale at a loss (or risk losing the entire inventory).

Energy price volatility is not going to go away. An organization has two options, try to predict the volatility and ride it out as best as it can, or try to restructure its operations such that it is not (as) dependent on volatile energy sources. There are two ways it can achieve this goal. First of all, it can focus on streamlining its operations to make them as lean as possible. Reducing the energy required is the first step. Secondly, it can invest in creating its own green energy sources to minimize its dependence on external sources. This will go a long way to not only stabilizing its energy costs, but to preventing energy spikes in the future.

01: Fiscal Crisis

The fiscal crisis can lead to many things — currency volatility, a credit crunch, and overall infrastructure fragility. Weakening currencies can cause costs to skyrocket. A credit crunch can severely restrict cash flow and make it almost impossible for an organization to temporarily borrow the cash it needs to secure the inventory required to produce the goods it plans to sell to create revenue and, eventually, generate profit. And infrastructure fragility, which weakens every time there is insufficient cash to invest in necessary maintenance, can result in transportation lanes, power plants, and basic utilities becoming unavailable overnight.

If the organization is a global multi-national, currency volatility can be mitigated by keeping keeping cash in multiple currencies. If a credit crunch is likely, the organization can reduce its expansion and investment plans to maintain enough cash on hand to continue operations without interruption. And if the infrastructure is becoming fragile, the organization can invest in infrastructure improvements. If the government will take loans (by selling bonds) to finance improvements, the organization can invest to insure continued availability of necessary public infrastructure. If not, the organization can invest in its own infrastructure to the greatest extent possible or relocate operations to where the infrastructure is strong and expected to stay strong.

Risk Mitigation 2012: Geopolitical

In our last post, we covered some potential mitigations for each of the top three environmental risks that we identified in our Risk 2011 series. In this post, we are going to cover some potential mitigations for each of the top three geopolitical risks as we continue our series of posts inspired by the World Economic Forum‘s recently released 6th annual Global Risks report, 2011 edition.

03: Corruption

Corruption can take many forms — bid rigging, bribery, collusion, fraud, embezzlement, organized crime, price fixing, and thievery just to name a few. Each of these can be devastating to your supply chain. Bid rigging, collusion, and price fixing can significantly increase your costs. Bribery and thievery can result in a loss of your IP and product plans which could negate years and tens of millions to hundreds of millions of research and development. Embezzlement and fraud could drain your organization of necessary operating capital and organized crime could result in an entire warehouse of inventory disappearing overnight.

While big rigging, collusion, and price fixing by your suppliers can’t be prevented, if the organization suspects it might be occurring, it can always invite new, unexpected, but pre-qualified, suppliers to a bid to minimize the possibility, or at least provide it with other options if multiple suppliers appear to be colluding. This is the best defence since, even if collusion and price fixing can be detected and proven, by the time government intervention occurs, it can be much too late.

And while one cannot prevent thieves from trying to steal your IP and products, steps can be taken to keep your IP secure. All electronic copies can be encrypted and kept secure on the network behind password protected firewalls, printed copies can be restricted to secure areas, and all unnecessary copies can be destroyed by destructive shredding. And your shipping plans can be kept on a need to know basis, and valuable merchandise can be kept in guarded secure warehouses.

Bribery, fraud, and embezzlement can also be prevented against to different degrees. With respect to bribery, an organization can watch for signs of an employee who recently improved his lifestyle significantly with no obvious means to do so (i.e. no recent inheritance or lottery win), determine if such employee had access to sensitive data, and the chance to sell it. In this case, if such an action was deemed likely, the organization could assume the data fell into the wrong hands and take preventative measures. With respect to embezzlement, an organization should insure that all transactions are reviewed by a second individual, and all transactions above a considerable amount should be co-reviewed by the CFO and another executive officer within two business days. And external audits should be conducted regularly. Other types of fraud could be harder to detect, but regular financial reviews are an organization’s best chance of detecting fraud before too much damage occurs.

02: Terrorism

Not only is terrorism on the rise, but so are the number of terrorist and extremist groups and agendas — and it’s almost impossible to predict which group will form, and be “crossed” by your organization well in advance of when it happens. But if an organization keeps up with global intelligence, it can keep up with what organizations have commercial, and corporate agendas, identify if it produces any goods or services that might be targeted by such groups, and identify if it operates in any high risk areas. If it does, it can take steps to protect its operations and its goods.

01: Geopolitical Conflict

Fortunately, most conflicts that would threaten an operation escalate over time. Again, if an organization keeps up with political happenings in a region, it can identify those regions most likely to be at risk of geopolitical conflict and determine if such conflict could impact operations or cut off supply. If factories could be cut off, the organization can identify back-up facilities and create plans for bringing them on-line quickly. If warehouses could be cut off, critical goods can be relocated. Knowing allows plans to be created.

Risk Mitigation 2012: Environment

In our last post, we covered some potential mitigations for each of the top three societal risks that we identified in our Risk 2011 series. In this post, we are going to cover some potential mitigations for each of the top three environmental risks as we continue our series of posts inspired by the World Economic Forum‘s recently released 6th annual Global Risks report, 2011 edition.

03: Climate Change

There is very little that a single corporation can do to prevent climate change. It can reduce it’s carbon emissions until they are almost zero, but if all of the other corporations don’t follow suit, the climate will change. And even if many other corporations follow suit, a major volcanic eruption that spewed cubic kilometres of ash into the air could significantly affect climate, as could a significant asteroid impact that sent cubic kilometres of dirt into the air and triggered a chain of volcanic eruptions.

However, if the temperature keeps rising, it is a given that sea levels will rise, droughts will worsen, and deserts will expand. These are three aspects of climate change an organization can plan for and take steps to minimize their impact. The organization can take care not to build near the ocean where the ground level is near sea level, as these areas would not only be at high risk of flooding as a result of high rains or tropical storms, but could be under sea level in the years to come. It can also avoid building near the edges of deserts as the water supply could become scarce as time goes on. And it can expect droughts in hotter regions and be sure to create additional reservoirs just in case.

02: Earthquakes & Volcanic Eruptions

Earthquakes can’t be prevented, and can’t be reliably predicted, but they are inevitable, and they are more likely in certain areas. Specifically, on the edge of active tectonic plates and near the Ring of Fire, the Mid-Atlantic Ridges, and the Mediterranean-Asian seismic belt. If you must maintain, or use, production facilities at, or near, these areas, make sure that you have secondary facilities available to you that can be ramped up quickly in case the primary are temporarily, or permanently, taken out by an earthquake.

The same goes for volcanos, but many volcanos that erupt are, or were recently, active. Thus, if there is, or was (in the past few hundred years) an active volcano in the nearby region, take the same precautions as you would if the production facility is in a major earthquake zone.

01: Flooding

Flood are becoming more common in recent years, and the devastation they can cause can be significant and far reaching. With sea levels projected to rise, the planet expected to warm, and the climate expected to change accordingly, the risk of floods is on the rise. As a result, you can expect more floods in years to come. Identify each location near the ocean, and especially near areas at risk of any kind of tropical storm (such as a hurricane, cyclone, or tsunami), and plan for the worst. As with earthquakes and volcanos, have secondary facilities lined up and ready to ramp up at a moment’s notice. And have one or more ways to quickly relocate inventory should the need arise.