Friday, November 28, 2008
Sunday, November 23, 2008
Lessons from Obama's Win from the Welchway
An article that I find has lessons to be learnt in our risk management efforts.
Link
http://www.welchway.com/Management/US-Economy-and-Government-Policy/Matters-of-State/Barack-Obama-s-Victory--Three-Lessons-for-Business.aspx
This column is not about ideology. The election is over. And while we believe John McCain is a great American whose economic platform made better sense for business, especially in terms of free trade, tax policy, and job creation, we look forward with hope to the Presidency of Barack Obama. If his is an America for all people, as he has so passionately promised, then surely it will also serve the interests of the millions of hard-working small-business owners and entrepreneurs who are so much a part of this country's strength and future.But enough of politics.This column is about the lessons business leaders can take from McCain's loss and Obama's win. Because even with the differences between running a campaign and a company, three critical leadership principles overlap.
And it was upon those principles that Obama's decisive victory was built.
Start with the granddad of leadership principles: a clear, consistent vision. If you want to galvanize followers, you simply cannot recast your message. Nor can you confuse or scare people. McCain's health-care policy, for example, had real merit. But his presentation of it was always confoundingly complex.Meanwhile, Obama's message was simple and aspirational. He talked about the failings of George W. Bush. He talked about change and hope and health care for all. Over and over, he painted a picture of the future that excited people. He also set a perfect example for business leaders: Stick to a limited number of points, repeat them relentlessly, and turn people on.
The next leadership principle should sound familiar: execution. In their seminal book by the same name, Larry Bossidy and Ram Charan made the case that execution isn't the only thing a leader needs to get right, but without it little else matters. This election proves their point. In nearly two years of steady blocking and tackling, Obama's team made few mistakes. From the outset, his advisers were best in class, and his players were always prepared, agile, and where they needed to be. McCain's team, hobbled by a less cohesive set of advisers and less money, couldn't compete.
Another, perhaps bigger, execution lesson can be taken from Obama's outmaneuvering of Hillary Clinton for the Democratic nomination. She thought she could win the old-fashioned way, by taking the big states of New York, Ohio, California, and so on. He figured out an unexpected way to gain an edge—in the usually overlooked caucuses.The business analog couldn't be more apt. So often, companies think they've nailed execution by doing the same old "milk run" better and better. But winning execution means doing the milk run perfectly—and finding new customers and opening new markets along the way. You can't just beat your rivals by the old rules; to grow, you have to invent a new game and beat them at that, too.
Finally, this election reinforces the value of friends in high places. From the start, Obama had support from the media, which chose to downplay controversies involving him. Meanwhile, after the primaries, McCain began to take a beating. In the end, no one could dispute that Obama's relationship with the media made a difference. As a business leader, you can't succeed without the endorsement of your board. Every time you try to usher in change, some people will resist. They may fight you openly in meetings, through the media, or with the subterfuge of palace intrigue. And you'll need to make your case in all those venues. But in the end, if your board has your back, defeat can be turned into victory.That's why you need to start any leadership initiative with your "high-level friends" firmly by your side, convinced of the merits of your character and policies. But that's not enough. If you want to keep your board as an ally, don't surprise them. Think about McCain's "gotcha" selection of Sarah Palin. Scrambling to catch up with the story, the media was not amused.Surely pundits will scrutinize this election for years to come. But business leaders can take its lessons right now. You may have winning ideas. But you need much more to win the game.
Link
http://www.welchway.com/Management/US-Economy-and-Government-Policy/Matters-of-State/Barack-Obama-s-Victory--Three-Lessons-for-Business.aspx
This column is not about ideology. The election is over. And while we believe John McCain is a great American whose economic platform made better sense for business, especially in terms of free trade, tax policy, and job creation, we look forward with hope to the Presidency of Barack Obama. If his is an America for all people, as he has so passionately promised, then surely it will also serve the interests of the millions of hard-working small-business owners and entrepreneurs who are so much a part of this country's strength and future.But enough of politics.This column is about the lessons business leaders can take from McCain's loss and Obama's win. Because even with the differences between running a campaign and a company, three critical leadership principles overlap.
And it was upon those principles that Obama's decisive victory was built.
Start with the granddad of leadership principles: a clear, consistent vision. If you want to galvanize followers, you simply cannot recast your message. Nor can you confuse or scare people. McCain's health-care policy, for example, had real merit. But his presentation of it was always confoundingly complex.Meanwhile, Obama's message was simple and aspirational. He talked about the failings of George W. Bush. He talked about change and hope and health care for all. Over and over, he painted a picture of the future that excited people. He also set a perfect example for business leaders: Stick to a limited number of points, repeat them relentlessly, and turn people on.
The next leadership principle should sound familiar: execution. In their seminal book by the same name, Larry Bossidy and Ram Charan made the case that execution isn't the only thing a leader needs to get right, but without it little else matters. This election proves their point. In nearly two years of steady blocking and tackling, Obama's team made few mistakes. From the outset, his advisers were best in class, and his players were always prepared, agile, and where they needed to be. McCain's team, hobbled by a less cohesive set of advisers and less money, couldn't compete.
Another, perhaps bigger, execution lesson can be taken from Obama's outmaneuvering of Hillary Clinton for the Democratic nomination. She thought she could win the old-fashioned way, by taking the big states of New York, Ohio, California, and so on. He figured out an unexpected way to gain an edge—in the usually overlooked caucuses.The business analog couldn't be more apt. So often, companies think they've nailed execution by doing the same old "milk run" better and better. But winning execution means doing the milk run perfectly—and finding new customers and opening new markets along the way. You can't just beat your rivals by the old rules; to grow, you have to invent a new game and beat them at that, too.
Finally, this election reinforces the value of friends in high places. From the start, Obama had support from the media, which chose to downplay controversies involving him. Meanwhile, after the primaries, McCain began to take a beating. In the end, no one could dispute that Obama's relationship with the media made a difference. As a business leader, you can't succeed without the endorsement of your board. Every time you try to usher in change, some people will resist. They may fight you openly in meetings, through the media, or with the subterfuge of palace intrigue. And you'll need to make your case in all those venues. But in the end, if your board has your back, defeat can be turned into victory.That's why you need to start any leadership initiative with your "high-level friends" firmly by your side, convinced of the merits of your character and policies. But that's not enough. If you want to keep your board as an ally, don't surprise them. Think about McCain's "gotcha" selection of Sarah Palin. Scrambling to catch up with the story, the media was not amused.Surely pundits will scrutinize this election for years to come. But business leaders can take its lessons right now. You may have winning ideas. But you need much more to win the game.
Friday, November 21, 2008
Snapshots of market doom and gloom
New lows in Dow
7,552.29 close
Oil dives below USD50.
- CMBS trading with yields around 13 percent, knocking them down to the same category as junk bonds, despite their top rating
- JPMorgan poised to cut investment banking staff
- HSBC trimming 500 staff in Asia
- Citigroup to shed 50,000 staff
INDONESIA
- Indonesian Rupiah down 23% this year against USD
- Indonesia changed its currency rules to make it more difficult to buy foreign exchange, requiring any purchases involving US$100,000 per month or more to support by transaction in goods or services. The measures, mostly affecting Indonesians rather than foreigners, would make speculative bets against rupiah depreciation more difficult.
- Oil and gas regulator, BPMigas, said it would order oil-and-gas contractors to use local banks to deposit the billions of dollars earmarked for energy.
Thursday, November 20, 2008
Thoughts on leadership
- People want to grow and be challenged
- People need new challenges regularly
- People want to be given opportunities to take on new responsibilities
- People needs to feel that they belong
- It takes time for people to show their potential
- People want to contribute to the organization
Tuesday, November 18, 2008
Thoughts on supply chain risk management
Holistic approach in supply chain risk management is not about supplier risk rather the inter-related elements of :
- Supplier risk
- Supply region risk
- Supply chain risk
- Commodity risk
More thoughts coming on this!
Responding to the financial crisis
Risk management is a combination of both art and science with the view to predict and manage the uncertain future. The financial crisis has provided us in the risk management fraternity to demonstrate the value proposition in managing risks.
Unfortunately in the midst of risk framework and processes, documentation, workshops to discuss risks and not to mention countless meetings, risk management in my view has become an academic exercise of identifying risk drivers or factors, assessing impact of these factors onto the exposures we have, and developing mitigation plans and strategies.
This creates the perception that is what risk management is all about when there is another important element : execution of the identified mitigation plans and strategies, putting to test the practicality of the strategies that shows much promise and provides assurance to management in beautiful PowerPoint slides and therefore, manage risks.
Therein lies the fundamental problem : That those in enterprise wide risk needs to have the perspective of reality facing businesses in managing the business portfolio and the risks and that it is not just about managing downside risks but also upside risks, and making the risk-return trade off decisions just as one would in the portfolio optimization, generating maximum returns for a stated level of risk, or minimizing risks for a stated level of return.
In the situation that we face arising from the financial crisis, we were caught unprepared because perhaps we have been dealing with known risks but not the unknown and unknowable. When the crisis hits, while the speed of which we responded during and post crisis, but were we prepared for the potential financial repercussions?
For example, we have always operated under a situation where access to banks and credit has been so many years that when credit conditions tightened considerably, it became difficult for companies, be it our customers or suppliers, to function as a business. Was banking system risk in our list of potential risks?
Right now what was risk management has turned into crisis management in our efforts to assess our ability to ride this financial turmoil. The crisis should be viewed as an opportunity to assess again the risk management value proposition, and lessons learnt can definitely be turned into shaping the practice of risk management in this organization centering on key elements of risk governance, risk integration, risk infrastructure and last but not least, the act of managing risks.
For those who are interested, I am in the midst of preparing lessons learnt from the financial crisis and long-term ramifications in shaping the practice of risk management.
Please note that this is my personal observation and does not in anyway denote that current risk management efforts are futile, but opportunities exist in re-shaping the risk management practice and transforming risk management as a competitive edge.
Unfortunately in the midst of risk framework and processes, documentation, workshops to discuss risks and not to mention countless meetings, risk management in my view has become an academic exercise of identifying risk drivers or factors, assessing impact of these factors onto the exposures we have, and developing mitigation plans and strategies.
This creates the perception that is what risk management is all about when there is another important element : execution of the identified mitigation plans and strategies, putting to test the practicality of the strategies that shows much promise and provides assurance to management in beautiful PowerPoint slides and therefore, manage risks.
Therein lies the fundamental problem : That those in enterprise wide risk needs to have the perspective of reality facing businesses in managing the business portfolio and the risks and that it is not just about managing downside risks but also upside risks, and making the risk-return trade off decisions just as one would in the portfolio optimization, generating maximum returns for a stated level of risk, or minimizing risks for a stated level of return.
In the situation that we face arising from the financial crisis, we were caught unprepared because perhaps we have been dealing with known risks but not the unknown and unknowable. When the crisis hits, while the speed of which we responded during and post crisis, but were we prepared for the potential financial repercussions?
For example, we have always operated under a situation where access to banks and credit has been so many years that when credit conditions tightened considerably, it became difficult for companies, be it our customers or suppliers, to function as a business. Was banking system risk in our list of potential risks?
Right now what was risk management has turned into crisis management in our efforts to assess our ability to ride this financial turmoil. The crisis should be viewed as an opportunity to assess again the risk management value proposition, and lessons learnt can definitely be turned into shaping the practice of risk management in this organization centering on key elements of risk governance, risk integration, risk infrastructure and last but not least, the act of managing risks.
For those who are interested, I am in the midst of preparing lessons learnt from the financial crisis and long-term ramifications in shaping the practice of risk management.
Please note that this is my personal observation and does not in anyway denote that current risk management efforts are futile, but opportunities exist in re-shaping the risk management practice and transforming risk management as a competitive edge.
The philosophy of integrated risk management
Guest column: Internationalisation – risk or opportunity?
By Torsten Jeworrek
The internationalisation of the economy is not as recent as the buzzword “globalisation” would have us believe. In fact, it was internationalisation that paved the way for the beginnings of the insurance industry back in the 14th century, as shipowners sought to protect the increasing value of their ships and cargoes. A document from 1347 is believed to be the oldest marine insurance contract.
Even today, the complex nature of risks emanating from international trade is one of the insurance industry’s most difficult challenges and one that affects all classes of business, as the following examples show:
1. More than 90 per cent of all world trade is transported by sea or other waterways. The largest container ships today, with cargoes of up to 13,000 containers, may be worth far in excess of $1bn. However, even this concentration of values is small compared with that found at the world’s great container ports, such as Singapore or Hamburg, which act as depots to goods worth tens of billions of dollars every day.
2. The outsourcing of production sites to low-wage countries does not just reduce costs. It can also reduce the quality of the goods produced. Defective products can result in recall costs or even product liability costs. Recent examples of recalls that spring to mind include toys coated with lead paint and toothpaste contaminated with the antifreeze diethylene glycol.
3. Liability losses can reach extreme proportions when pharmaceutical products cause dangerous side-effects in patients. National law in the country where the products are sold plays a key role in this connection. The US, in particular, has seen some extremely high awards for damages. For example, in November 2007 pharmaceutical giant Merck had to pay $4.85bn damages in the US alone following several thousand cases of heart attacks and strokes caused by its Vioxx painkiller.
These examples highlight the enormous extent of the insurance industry’s role in the global economy.
Insurance companies that cover such large risks need a secondary market where they can place them. Reinsurers assume this function. Sharing the load among several carriers helps to spread the risks. The diversification effects achieved by spreading risks across different regions and classes of business allows reinsurers to balance their portfolios and realise a level of capital efficiency that enables them to cover their clients’ risks – and ultimately those of the insureds – at a reasonable price.
Extreme losses in the past show just how important the reinsurer’s role is. One of the biggest loss events in the history of insurance was on September 11, 2001. The attack on the World Trade Center in New York was a prime example of the complexity of today’s risks, with accumulation of losses across a range of insurance classes such as fire, business interruption, liability, life and health, and compounded by significant capital market losses. The economic losses could only be remotely estimated at $100bn. The losses for the international insurance industry came to $40bn, with $24bn of this covered by the reinsurance industry.*
The insurance industry also bore the brunt of the losses in the 2005 hurricane season with Rita, Wilma and Katrina. Some US$ 94bn of the aggregate losses of US$ 180bn was borne by the insurance industry, US$ 42bn by the reinsurance industry alone. *
The insurance of large and accumulation risks is a definite advantage for the sustainable development of economies. In countries where insurance is not very far advanced, it is the vulnerable economies and above all the inhabitants that have to bear the brunt of these losses. The tsunami of 2004 not only brought immense human suffering but also caused losses of over US$ 10bn. As the insurance density in the regions affected is still very low, the insurance industry only covered a small percentage of these losses, less than US$ 1bn.*
Countries with an underdeveloped system of insurance suffer immeasurably more from major catastrophes than those where a good part of the material losses can be covered by professional risk carriers.
Reinsurance has always been an international business since its beginnings in the middle of the 19th century. By assuming a number of independent risks in different regions of the world, reinsurers create a balance in their portfolios. However, the causal and regional links between risks used to be much less pronounced than they are today. The global economy is increasingly networked and interconnected. Risks are becoming ever more complex and the insurance industry has to develop new concepts for its clients in order to meet their need for risk cover in this changed environment.
To respond to this development, enterprise risk management has become increasingly important, especially for reinsurers themselves. They have to consider not only the complexity of the original risk, but also the fact that one and the same risk frequently comes from a large number of different sources, such as through international insurers.
To deal with these challenges, Munich Re has founded a central unit, Integrated Risk Management, which is responsible for uniform group-wide identification and handling of large and accumulation risks.
The regional business units, supported by a global network of local units, are thoroughly familiar with the special features of the individual markets. Together with clients, they develop solutions for the assumption of risks. Centralised risk management processes ensure that cross-regional and cross-line risks are identified and suitably limited in Munich Re’s aggregate portfolio.
In this process, there is clearly a lot more to consider than just the underwriting risk. For example, if we cover significant product-liability risks of a pharmaceutical company, we do not then buy large amounts of stock in this company. This ensures that we are not struck twice when large claims payments are accompanied by a fall in the company’s share price.
Failure to implement such a holistic risk management policy can lead to a dramatic underestimation of the true risk position.
This has been evident in the current financial market crisis. For successful risk management, it is essential to identify concentration risks and systemic risks for which diversification in the portfolio does not work.
Far-reaching risk trading mechanisms can lead to very high systemic risks for the entire sector involved. The insurance industry has therefore created global standards. It learnt its lessons from the LMX (London Market Excess of Loss) spiral in the late 1980s, where risks were passed on endlessly in the London market. Two key principles in the global insurance systems are that players must have a sizeable retention in the insurance risk, and that risk transfer in the insurance sector ends with retrocession, or the protection of reinsurers. There may be no further transfer of risk beyond this.
Munich Re seeks to achieve a suitable balance between opportunity and risk – to play a meaningful role in global economic development and in so doing create profit for our stakeholders.
At the same time, we also want to contribute to economic and technological progress and thus to the development of society as a whole. We do this by providing our clients with as much capacity as possible and with optimal innovative solutions – for example through the cover of new climate-protection technologies.
With our Integrated Risk Management we ensure that our company is protected against losses that may threaten its existence – so that we are always in a position to meet our obligations to our clients.
*All the loss estimates above are in 2007 dollars (adjusted for inflation).
Torsten Jeworrek is a member of the board of management at reinsurer Munich Re.
Link
http://www.ft.com/cms/s/0/74d43adc-b43e-11dd-8e35-0000779fd18c.html
Copyright The Financial Times Limited 2008
By Torsten Jeworrek
The internationalisation of the economy is not as recent as the buzzword “globalisation” would have us believe. In fact, it was internationalisation that paved the way for the beginnings of the insurance industry back in the 14th century, as shipowners sought to protect the increasing value of their ships and cargoes. A document from 1347 is believed to be the oldest marine insurance contract.
Even today, the complex nature of risks emanating from international trade is one of the insurance industry’s most difficult challenges and one that affects all classes of business, as the following examples show:
1. More than 90 per cent of all world trade is transported by sea or other waterways. The largest container ships today, with cargoes of up to 13,000 containers, may be worth far in excess of $1bn. However, even this concentration of values is small compared with that found at the world’s great container ports, such as Singapore or Hamburg, which act as depots to goods worth tens of billions of dollars every day.
2. The outsourcing of production sites to low-wage countries does not just reduce costs. It can also reduce the quality of the goods produced. Defective products can result in recall costs or even product liability costs. Recent examples of recalls that spring to mind include toys coated with lead paint and toothpaste contaminated with the antifreeze diethylene glycol.
3. Liability losses can reach extreme proportions when pharmaceutical products cause dangerous side-effects in patients. National law in the country where the products are sold plays a key role in this connection. The US, in particular, has seen some extremely high awards for damages. For example, in November 2007 pharmaceutical giant Merck had to pay $4.85bn damages in the US alone following several thousand cases of heart attacks and strokes caused by its Vioxx painkiller.
These examples highlight the enormous extent of the insurance industry’s role in the global economy.
Insurance companies that cover such large risks need a secondary market where they can place them. Reinsurers assume this function. Sharing the load among several carriers helps to spread the risks. The diversification effects achieved by spreading risks across different regions and classes of business allows reinsurers to balance their portfolios and realise a level of capital efficiency that enables them to cover their clients’ risks – and ultimately those of the insureds – at a reasonable price.
Extreme losses in the past show just how important the reinsurer’s role is. One of the biggest loss events in the history of insurance was on September 11, 2001. The attack on the World Trade Center in New York was a prime example of the complexity of today’s risks, with accumulation of losses across a range of insurance classes such as fire, business interruption, liability, life and health, and compounded by significant capital market losses. The economic losses could only be remotely estimated at $100bn. The losses for the international insurance industry came to $40bn, with $24bn of this covered by the reinsurance industry.*
The insurance industry also bore the brunt of the losses in the 2005 hurricane season with Rita, Wilma and Katrina. Some US$ 94bn of the aggregate losses of US$ 180bn was borne by the insurance industry, US$ 42bn by the reinsurance industry alone. *
The insurance of large and accumulation risks is a definite advantage for the sustainable development of economies. In countries where insurance is not very far advanced, it is the vulnerable economies and above all the inhabitants that have to bear the brunt of these losses. The tsunami of 2004 not only brought immense human suffering but also caused losses of over US$ 10bn. As the insurance density in the regions affected is still very low, the insurance industry only covered a small percentage of these losses, less than US$ 1bn.*
Countries with an underdeveloped system of insurance suffer immeasurably more from major catastrophes than those where a good part of the material losses can be covered by professional risk carriers.
Reinsurance has always been an international business since its beginnings in the middle of the 19th century. By assuming a number of independent risks in different regions of the world, reinsurers create a balance in their portfolios. However, the causal and regional links between risks used to be much less pronounced than they are today. The global economy is increasingly networked and interconnected. Risks are becoming ever more complex and the insurance industry has to develop new concepts for its clients in order to meet their need for risk cover in this changed environment.
To respond to this development, enterprise risk management has become increasingly important, especially for reinsurers themselves. They have to consider not only the complexity of the original risk, but also the fact that one and the same risk frequently comes from a large number of different sources, such as through international insurers.
To deal with these challenges, Munich Re has founded a central unit, Integrated Risk Management, which is responsible for uniform group-wide identification and handling of large and accumulation risks.
The regional business units, supported by a global network of local units, are thoroughly familiar with the special features of the individual markets. Together with clients, they develop solutions for the assumption of risks. Centralised risk management processes ensure that cross-regional and cross-line risks are identified and suitably limited in Munich Re’s aggregate portfolio.
In this process, there is clearly a lot more to consider than just the underwriting risk. For example, if we cover significant product-liability risks of a pharmaceutical company, we do not then buy large amounts of stock in this company. This ensures that we are not struck twice when large claims payments are accompanied by a fall in the company’s share price.
Failure to implement such a holistic risk management policy can lead to a dramatic underestimation of the true risk position.
This has been evident in the current financial market crisis. For successful risk management, it is essential to identify concentration risks and systemic risks for which diversification in the portfolio does not work.
Far-reaching risk trading mechanisms can lead to very high systemic risks for the entire sector involved. The insurance industry has therefore created global standards. It learnt its lessons from the LMX (London Market Excess of Loss) spiral in the late 1980s, where risks were passed on endlessly in the London market. Two key principles in the global insurance systems are that players must have a sizeable retention in the insurance risk, and that risk transfer in the insurance sector ends with retrocession, or the protection of reinsurers. There may be no further transfer of risk beyond this.
Munich Re seeks to achieve a suitable balance between opportunity and risk – to play a meaningful role in global economic development and in so doing create profit for our stakeholders.
At the same time, we also want to contribute to economic and technological progress and thus to the development of society as a whole. We do this by providing our clients with as much capacity as possible and with optimal innovative solutions – for example through the cover of new climate-protection technologies.
With our Integrated Risk Management we ensure that our company is protected against losses that may threaten its existence – so that we are always in a position to meet our obligations to our clients.
*All the loss estimates above are in 2007 dollars (adjusted for inflation).
Torsten Jeworrek is a member of the board of management at reinsurer Munich Re.
Link
http://www.ft.com/cms/s/0/74d43adc-b43e-11dd-8e35-0000779fd18c.html
Copyright The Financial Times Limited 2008
Making headways
The meeting today was indeed fruitful in that we understand the country platforms where risk and more importantly the management of risk can be integrated. We discussed the escalation approaches,the rationale for such approaches, the efforts currently underway led by IBU and the need to expedite management of risks given the situation facing us now.
Looking forward to forging new relationships!
Looking forward to forging new relationships!
Monday, November 17, 2008
Things occupying my mind
Sometimes I have too many things occupying my mind that it becomes paralysis by analysis or perhaps over-analysis. I would like to think that at this juncture in my career I should work differently and that the leadership I provide is the one that ultimately matters and not the nitty-gritty of the various aspects of financial risk management. So why do I feel that I have not delivered?
Things occupying my mind and in no particular order of importance:
Things occupying my mind and in no particular order of importance:
- The CFP Compliance and its analysis for two very big entities within the Group.
- The CFP Supporting Guidelines that is long overdue
- The long-term perspectives of CFP in terms of consistency in approach, governance, building capability as advisor
- Alignment to Group Risk efforts and the effort it takes knowing how I approach things
- The issuance of alerts that needs to be sent out
- The management (or mismanagement) of a major systems upgrade project
- The foundations of a major project, resource management with the stretched resources that we have, the overall approach
- The different philosophy that I have in leading the financial crisis task force
- Staff development, coaching and feedback
- Managing market risks vs. counter-party risks
- Leading the FX in Financing Value Chain initiative
- The PCP Engagement Session and coordination of such a meeting
- Indonesia Country Risk Strategy and our role in providing the financial risk perspective
The list goes on and on....when can I take a breather?
HELP!
A new framework for supply chain risk management
It is precisely due to the issues faced below in supply chain risk management that we require a new approach in supply chain risk management. Read on and tell me what you think. Are we facing the same issues? How are we managing these risks?
The idea of a "crisis cell" might suggest counterterrorism more than it does corporate risk management. But at Safran, the French aerospace and defence company, it is the name of a team charged with responding to the ever-increasing pressure on its global supply chain.
Safran's crisis cell monitors the group's 4,000 suppliers, which receive €5.3bn ($6.7bn, £4.5bn) in total a year in return for products and equipment. Xavier Dessemond, Safran's purchasing director, says the aim is to deal with the problem in "a preventative manner". He adds that while no supplier has yet experienced great difficulties, "We know there is a crisis and we know our industry will be probably affected".
It is a growing concern for manufacturers worldwide. Companies' supply chains have become far more global in the past decade, with the consequence that stress from the financial crisis is spreading quickly to suppliers large and small. It is testing the global supply chain to an extent rarely seen and spurring companies in industries from aerospace to retailing to take extraordinary measures.
VT Group, a leading British defence group, is a good example. The former Vosper Thornycroft has a solid business, as many of its orders come from the UK government. But in the past two weeks it summoned its leading 100 suppliers - which account for about 70 per cent of its £500m ($740m, €580m) annual supply budget - to a meeting.
The message from Paul Lester, chief executive, was stark: "If you get into financial difficulties, don't delay but come and talk to us. You are probably better talking to us than banks, because banks aren't really doing their jobs right now and we can help."
Possibilities for help include paying suppliers in cash earlier, giving them longer orders or even lending them workers, says Mr Lester. At Safran, Mr Dessemond says his company could put capital into its suppliers, help them obtain aid from government agencies or change payment terms - but all only in "exceptional cases".
Mr Lester says simply: "We want a bloody good supply base. And we are just nervous that, particularly among SMEs [small and mid-sized enterprises], somebody will get into difficulties."
A small software supplier to VT did go bust recently - the latest in a number of European supplier collapses, from Stankiewicz, the German car parts supplier, to several manufacturers that serve UK retailers.
All this marks a huge shift for many large industrial groups. During the summer, much of the talk focused on whether their suppliers had the capacity to keep up with demand. "It is amazing how the conversation has changed in the last few months," says Aaron Davis, the marketing director of Schneider Electric, the French energy management company.
Now, many suppliers are more likely to be calling to ask for bail-outs. The culprit is obvious, according to manufacturers: it is the banks. VDA, the German carmakers' association, accuses some banks of "making credit lines more expensive, withdrawing them or making credit due in the short term". Ratings agencies such as Moody's and Fitch point to the increased difficulties small and medium-sized companies face in securing credit from banks.
But the big companies may also be partly to blame. Many have squeezed suppliers mercilessly for years. The car industry is renowned for manufacturers suddenly imposing demands for 10 per cent across-the-board cuts in component prices. Likewise, UK retailers led by Tesco have succeeded in pushing payment terms with suppliers increasingly in their favour. Tesco has increased the time it takes to pay for some goods from 30 to 60 days.
Bart Becht, chief executive of Reckitt Benckiser, the consumer goods group, last month criticised such moves as making no sense. According to an industry insider, meanwhile, suppliers have complained in recent days that another large supermarket group has just asked for 15 per cent price cuts.
Julie Metelko, a business improvement specialist at PA Consulting, says that approach risks backfiring on large companies: "If suppliers aren't getting cash, then you risk taking them out."
That is why companies such as Daimler, the German luxury carmaker, and some of its rivals are looking at giving cash straight to suppliers in difficulties. "Three hundred thousand jobs are at risk in this industry - due to a crisis that was not caused by small and mid-sized companies but [which] is making them suffer massively," says Dieter Zetsche, Daimler's chief executive. Volkswagen, Europe's largest carmaker, has set up a special team to stop suppliers from collapsing.
Counterparty risk is well-known in the financial world, where it refers to the chance one side of an agreement will default. As it becomes a concept to be reckoned with in the real economy, manufacturers are checking their exposure. "We have got to look at risk in the supply chain much more closely. Is your Chinese supplier financially sound? Are they capable of maintaining your supply?" asks Tim Lawrence, a supply chain expert at PA Consulting.
Many counter that they have double or triple sourcing, with suppliers for the same part spread across the world. "In tough times like these, you need as much as possible to keep two suppliers. Globalisation helps here," says Pierre-Jean Sivignon, chief financial officer at Philips, the Dutch electronics group. Don Gogel, chief executive of Clayton, Dubilier & Rice, the US private equity firm, says: "Globalisation is a big positive, as it has led to multiple suppliers around the world."
But doubts remain. One is over how quickly a supplier can respond to take over the capacity if one of its rivals collapses. Another is the fact that some components are so complex they are manufactured only by one supplier. Additionally, companies such as carmakers often use one supplier for each model or project, meaning changing component makers could take months.
Just-in-time delivery - long the mantra of many manufacturers worldwide - is also turning into a possible weakness in the supply chain. A problem with just one supplier can throw the entire system into chaos, as can shipping difficulties. Manufacturing experts say that for those and other reasons they are starting to see western companies bring back operations or suppliers from far-off countries in Asia to closer to home: eastern Europe or Mexico.
"We are hearing about it more and more - that companies that went to China and elsewhere in Asia for the low costs are facing rising energy and labour costs. So they are bringing production back closer to home either to the UK or more likely to eastern Europe," says Jane Lodge, head of the manufacturing industry team at Deloitte in London.
Reports suggest 67,000 factories in China closed in the first half of this year because of the slowdown in exports. Richard Meddings, chief financial officer at Standard Chartered, says the Asian-focused bank is looking much more closely at what is happening to small and mid-sized companies as well as exporters. But he says Asia is still holding up well: "It is coping quite well but the world is obviously slowing. The order chains are still working."
Once-booming countries such as Russia are suffering more. Yann Vincent, chief operating officer of Avtovaz, the country's largest carmaker, says: "We have suppliers that are crying. They say, 'If you don't pay us x million roubles, we won't be producing - because we don't have credit'."
Other big risks remain in the supply chain. One is the reduction of inventory levels - known as destocking - that is taking place across many industries. "There is a huge effect of massive destocking in all supply pipelines. Lots of people are waiting to buy things as they believe raw materials will only become cheaper. It is a vicious spiral," says Feike Sijbesma, chief executive of DSM, the Dutch life sciences company. Destocking has also occurred in retail supply chains in a big way despite Christmas being so close.
One factor driving the cuts in stock is the approach of the end of the year for accounting. Many companies are keen to have as much cash on their balance sheets as possible by year-end. Ms Metelko says: "Everybody is being much more aggressive this year, especially as they're looking at weaker demand."
Daniel Corsten, a professor at the IE Business School at Madrid, says these are desperate times for some otherwise solid suppliers: "Supply chains are generally in good shape . . . But what we see now is very worrying. Previously robust suppliers in terms of quality and reliability cannot finance their production cycle any more. Shrinking demand means that customers pay late, less, or default, and as a consequence suppliers receive theirs less and late. Counterparty risk has reached the real economy."
The troubles faced by Land Rover's Discovery four-wheel-drive vehicle shows how much havoc can be wreaked by a problem in the supply chain. In 2002 Land Rover, then owned by Ford, said it might have to stop production of the Discovery because the only supplier of its chassis - UPF-Thompson - had gone bankrupt.
The carmaker estimated it would have taken six to nine months to find an alternative supplier, putting 11,000 jobs at risk at Land Rover and its suppliers. The cost of having dual suppliers would have doubled the £12m ($18m, €14m) investment needed for the chassis, the company said at the time.
The end result was messy. KPMG, the receivers for UPF, demanded about £60m from Land Rover to maintain supplies of the chassis. Land Rover accused KPMG of holding it to ransom and the matter ended up in court. Under a settlement, Land Rover paid an estimated £15m to take on UPF's debt.
Land Rover said the case underlined the need to reform bankruptcy law. But, in an illustration of the complexity of such issues, UK ministers were unsympathetic as they believed the carmaker had negotiated an original price on the chassis that left UPF making a loss on every component.
Copyright The Financial Times Limited 2008
The idea of a "crisis cell" might suggest counterterrorism more than it does corporate risk management. But at Safran, the French aerospace and defence company, it is the name of a team charged with responding to the ever-increasing pressure on its global supply chain.
Safran's crisis cell monitors the group's 4,000 suppliers, which receive €5.3bn ($6.7bn, £4.5bn) in total a year in return for products and equipment. Xavier Dessemond, Safran's purchasing director, says the aim is to deal with the problem in "a preventative manner". He adds that while no supplier has yet experienced great difficulties, "We know there is a crisis and we know our industry will be probably affected".
It is a growing concern for manufacturers worldwide. Companies' supply chains have become far more global in the past decade, with the consequence that stress from the financial crisis is spreading quickly to suppliers large and small. It is testing the global supply chain to an extent rarely seen and spurring companies in industries from aerospace to retailing to take extraordinary measures.
VT Group, a leading British defence group, is a good example. The former Vosper Thornycroft has a solid business, as many of its orders come from the UK government. But in the past two weeks it summoned its leading 100 suppliers - which account for about 70 per cent of its £500m ($740m, €580m) annual supply budget - to a meeting.
The message from Paul Lester, chief executive, was stark: "If you get into financial difficulties, don't delay but come and talk to us. You are probably better talking to us than banks, because banks aren't really doing their jobs right now and we can help."
Possibilities for help include paying suppliers in cash earlier, giving them longer orders or even lending them workers, says Mr Lester. At Safran, Mr Dessemond says his company could put capital into its suppliers, help them obtain aid from government agencies or change payment terms - but all only in "exceptional cases".
Mr Lester says simply: "We want a bloody good supply base. And we are just nervous that, particularly among SMEs [small and mid-sized enterprises], somebody will get into difficulties."
A small software supplier to VT did go bust recently - the latest in a number of European supplier collapses, from Stankiewicz, the German car parts supplier, to several manufacturers that serve UK retailers.
All this marks a huge shift for many large industrial groups. During the summer, much of the talk focused on whether their suppliers had the capacity to keep up with demand. "It is amazing how the conversation has changed in the last few months," says Aaron Davis, the marketing director of Schneider Electric, the French energy management company.
Now, many suppliers are more likely to be calling to ask for bail-outs. The culprit is obvious, according to manufacturers: it is the banks. VDA, the German carmakers' association, accuses some banks of "making credit lines more expensive, withdrawing them or making credit due in the short term". Ratings agencies such as Moody's and Fitch point to the increased difficulties small and medium-sized companies face in securing credit from banks.
But the big companies may also be partly to blame. Many have squeezed suppliers mercilessly for years. The car industry is renowned for manufacturers suddenly imposing demands for 10 per cent across-the-board cuts in component prices. Likewise, UK retailers led by Tesco have succeeded in pushing payment terms with suppliers increasingly in their favour. Tesco has increased the time it takes to pay for some goods from 30 to 60 days.
Bart Becht, chief executive of Reckitt Benckiser, the consumer goods group, last month criticised such moves as making no sense. According to an industry insider, meanwhile, suppliers have complained in recent days that another large supermarket group has just asked for 15 per cent price cuts.
Julie Metelko, a business improvement specialist at PA Consulting, says that approach risks backfiring on large companies: "If suppliers aren't getting cash, then you risk taking them out."
That is why companies such as Daimler, the German luxury carmaker, and some of its rivals are looking at giving cash straight to suppliers in difficulties. "Three hundred thousand jobs are at risk in this industry - due to a crisis that was not caused by small and mid-sized companies but [which] is making them suffer massively," says Dieter Zetsche, Daimler's chief executive. Volkswagen, Europe's largest carmaker, has set up a special team to stop suppliers from collapsing.
Counterparty risk is well-known in the financial world, where it refers to the chance one side of an agreement will default. As it becomes a concept to be reckoned with in the real economy, manufacturers are checking their exposure. "We have got to look at risk in the supply chain much more closely. Is your Chinese supplier financially sound? Are they capable of maintaining your supply?" asks Tim Lawrence, a supply chain expert at PA Consulting.
Many counter that they have double or triple sourcing, with suppliers for the same part spread across the world. "In tough times like these, you need as much as possible to keep two suppliers. Globalisation helps here," says Pierre-Jean Sivignon, chief financial officer at Philips, the Dutch electronics group. Don Gogel, chief executive of Clayton, Dubilier & Rice, the US private equity firm, says: "Globalisation is a big positive, as it has led to multiple suppliers around the world."
But doubts remain. One is over how quickly a supplier can respond to take over the capacity if one of its rivals collapses. Another is the fact that some components are so complex they are manufactured only by one supplier. Additionally, companies such as carmakers often use one supplier for each model or project, meaning changing component makers could take months.
Just-in-time delivery - long the mantra of many manufacturers worldwide - is also turning into a possible weakness in the supply chain. A problem with just one supplier can throw the entire system into chaos, as can shipping difficulties. Manufacturing experts say that for those and other reasons they are starting to see western companies bring back operations or suppliers from far-off countries in Asia to closer to home: eastern Europe or Mexico.
"We are hearing about it more and more - that companies that went to China and elsewhere in Asia for the low costs are facing rising energy and labour costs. So they are bringing production back closer to home either to the UK or more likely to eastern Europe," says Jane Lodge, head of the manufacturing industry team at Deloitte in London.
Reports suggest 67,000 factories in China closed in the first half of this year because of the slowdown in exports. Richard Meddings, chief financial officer at Standard Chartered, says the Asian-focused bank is looking much more closely at what is happening to small and mid-sized companies as well as exporters. But he says Asia is still holding up well: "It is coping quite well but the world is obviously slowing. The order chains are still working."
Once-booming countries such as Russia are suffering more. Yann Vincent, chief operating officer of Avtovaz, the country's largest carmaker, says: "We have suppliers that are crying. They say, 'If you don't pay us x million roubles, we won't be producing - because we don't have credit'."
Other big risks remain in the supply chain. One is the reduction of inventory levels - known as destocking - that is taking place across many industries. "There is a huge effect of massive destocking in all supply pipelines. Lots of people are waiting to buy things as they believe raw materials will only become cheaper. It is a vicious spiral," says Feike Sijbesma, chief executive of DSM, the Dutch life sciences company. Destocking has also occurred in retail supply chains in a big way despite Christmas being so close.
One factor driving the cuts in stock is the approach of the end of the year for accounting. Many companies are keen to have as much cash on their balance sheets as possible by year-end. Ms Metelko says: "Everybody is being much more aggressive this year, especially as they're looking at weaker demand."
Daniel Corsten, a professor at the IE Business School at Madrid, says these are desperate times for some otherwise solid suppliers: "Supply chains are generally in good shape . . . But what we see now is very worrying. Previously robust suppliers in terms of quality and reliability cannot finance their production cycle any more. Shrinking demand means that customers pay late, less, or default, and as a consequence suppliers receive theirs less and late. Counterparty risk has reached the real economy."
The troubles faced by Land Rover's Discovery four-wheel-drive vehicle shows how much havoc can be wreaked by a problem in the supply chain. In 2002 Land Rover, then owned by Ford, said it might have to stop production of the Discovery because the only supplier of its chassis - UPF-Thompson - had gone bankrupt.
The carmaker estimated it would have taken six to nine months to find an alternative supplier, putting 11,000 jobs at risk at Land Rover and its suppliers. The cost of having dual suppliers would have doubled the £12m ($18m, €14m) investment needed for the chassis, the company said at the time.
The end result was messy. KPMG, the receivers for UPF, demanded about £60m from Land Rover to maintain supplies of the chassis. Land Rover accused KPMG of holding it to ransom and the matter ended up in court. Under a settlement, Land Rover paid an estimated £15m to take on UPF's debt.
Land Rover said the case underlined the need to reform bankruptcy law. But, in an illustration of the complexity of such issues, UK ministers were unsympathetic as they believed the carmaker had negotiated an original price on the chassis that left UPF making a loss on every component.
Copyright The Financial Times Limited 2008
This new responsibility and what to make of it
Act locally to embed the right attitude to risk
Published: November 17 2008 02:00 Last updated: November 17 2008 02:00
From Ms Gail Easterbrook.
Sir, World leaders at the weekend's Group of 20 summit in Washington may have discussed the idea of giving the International Monetary Fund new regulatory powers - to provide an "early warning" of risks to the global economy. And good luck to them. Meanwhile, directors and managers must act locally if they are to avoid repeating the mistakes that led to the global financial crisis. Risks that matter to companies cannot be macro-managed by an international watchdog. Every organisation should examine and construct its own "risk culture".
Self-regulation is the best way for the board of any business to address the risks it is likely to encounter and implant the right controls. This is how to create an ethical and effective corporate environment.
Risk is not something to be avoided. It should be embraced. Without risk there are no rewards. It is a matter of embedding the right attitude to it. To achieve a healthy risk culture, Boards must invest adequately in risk management resources. A highly trained internal audit function will help senior management develop a strategic overview of all the risks an organisation faces. A system of controls, correctly monitored, can provide assurance to the board.
Every day there is a new call for directors and non-executives to look properly and clearly at the risks to their organisations. One glance at the results of the mismanagement of risk in the banking sector should be enough to send many directors with renewed purpose back to the boardroom. There, a free and frank discussion should ensue. It's around the boardroom table, not at the G20 summit, that risk management begins.
Gail Easterbrook,
Chief Executive,
Institute of Internal Auditors - UK and Ireland,
London SW4, UK
Free and frank discussion in the boardroom....this will indeed be a new challenging journey for me!
Published: November 17 2008 02:00 Last updated: November 17 2008 02:00
From Ms Gail Easterbrook.
Sir, World leaders at the weekend's Group of 20 summit in Washington may have discussed the idea of giving the International Monetary Fund new regulatory powers - to provide an "early warning" of risks to the global economy. And good luck to them. Meanwhile, directors and managers must act locally if they are to avoid repeating the mistakes that led to the global financial crisis. Risks that matter to companies cannot be macro-managed by an international watchdog. Every organisation should examine and construct its own "risk culture".
Self-regulation is the best way for the board of any business to address the risks it is likely to encounter and implant the right controls. This is how to create an ethical and effective corporate environment.
Risk is not something to be avoided. It should be embraced. Without risk there are no rewards. It is a matter of embedding the right attitude to it. To achieve a healthy risk culture, Boards must invest adequately in risk management resources. A highly trained internal audit function will help senior management develop a strategic overview of all the risks an organisation faces. A system of controls, correctly monitored, can provide assurance to the board.
Every day there is a new call for directors and non-executives to look properly and clearly at the risks to their organisations. One glance at the results of the mismanagement of risk in the banking sector should be enough to send many directors with renewed purpose back to the boardroom. There, a free and frank discussion should ensue. It's around the boardroom table, not at the G20 summit, that risk management begins.
Gail Easterbrook,
Chief Executive,
Institute of Internal Auditors - UK and Ireland,
London SW4, UK
Free and frank discussion in the boardroom....this will indeed be a new challenging journey for me!
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