05: Risk handling I Proactive (2 - Relationship mgmt + risk tansfer) Flashcards
Intutition behind relationship mgmt and Driving analogy?
- Clean windshield for broad forward visibility and transparency
- Coordinate with other drivers using traffic rules and lights
- Define what each driver commits to do
- Under each potential set of circumstances they may
encounter
Incentives to honor traffic rules and lights
- Tickets, insurance costs, accidents, loss of right to drive…
- Each driver’s individual best interest ensures performance to overall win-win
What is relationship management about? (high level=
relationship management to manage risk: communicate, collaborate, and share
What does relationship management reeduce?
reduces uncertainty in the supply chain:
- Selection of reliable suppliers (e.g., quality)
- Develop suppliersTraining, development, quality control
- Selection of reliable logistics service providers (e.g., transportation reliability)
- Improve confidence and trust
- Improve visibility (transparent information sharing)
What are the two types of relationships?
- inter-organizational
- inter-personal
–>need a lot of time and effort to establish but can be easily destroye
What kind of initiatives exist to effectively stabilize suppliers uunder risk?
Financial interventions:
Indirect:
- Cash flow support
- Non-rewarded support
Direct intervetion:
- asset invetment, Loan provisio
Non-financial interventions:
- volume consolidation
Direct:
- soucing contrcts
- operational excellence
Simple idea of risk transfer and hedging? (Formula)
𝜋 = Rev - Cost - X
to manage X –>find a random variable Y that is correlated with X
𝜋 = Rev - Cost - X + Y <- Hedge or insurance
What is a simple and perfect hedge?
simple hedge: involve two securities with negative correlations
Perfect hedge: remove the undesirable random variable completely (both random variables neutralizes themselves)
What are the two methods of risk tansfer?
- insurance
- hedging
What is insurance? (def)
is a risk-transfer mechanism that ensures financial compensation for a loss or damage caused by events beyond the control of the insured party
What is insurance? (Process)
- Firms regularly pay an insurance premium and receive financial adjustment in case of an insured loss or damage
- Insurance companies regularly receive premiums from their clients. They pool their clients’ risks to make payments more affordable for the insured
What is insurance about?
Insurance is about pooling the resources of a large number of people with similar risks to make sure that the few who experience loss are protected
Example of transportation insurances: losses
Transportation, shipping, or cargo insurance is one of the oldest insurance products (cf. merchants of Genoa, Lloyds of London)
–>Covers the loss or damage of transportation vehicles/ vessels by which property is transferred or held between the points of origin and the final destination
Transpotationn insurance: thefts
-
Cargo theft is an international problem as cargo can be stolen at any point in the supply chain
– An estimated $ 30 billion in cargo is stolen annually in the US alone
–> Insurance covers these losses that occur for example from trailer theft or warehouse burglaries
What the different forms of business interruption risk?
- property business interruption (BI)
- Contigent Business interruption
What is the setting for CBI (Contingent Business Interruption)
Setting:
- Physical loss or damage takes place at a supplier’s facility which is not owned by the insured buying firm
- Business interruption at the insured buying firm
–>CBI provides time element loss coverage
–>extends coverage beyond damage to the insured’s own property
–> not covered:
- strikes, lock-outs
- financial failure of suppliers
What is “property BI insurances”?
provides coverage for the financial losses a business may incur due to a temporary interruption of its operations caused by damage to its own property
What are two mechanism that companies are typically exposed to and need to hedge against?
- market price for oil
- foreign exchange rate
What kind of risk does foreign exhange rate impose on firms?
(What is single transaction exposure and what is necessary?
Single transaction exposure:
- The risk associated with a particular contractual payment of foreign currency;
- Example: single payment to a supplier
Two conditions necessary for exposure:
- Cash flow is denominated in foreign currency
- Cash flow will occur in the future
What kind of risk does foreign exhange rate impose on firms?
(operating exposure)
Operating exposure (multiple transactions):
The risk to the firm that its long-term cash flows will be (negatively) affected by unexpected future exchange rate changes
What can help to reduce the exposure to risks form volatile financial markets?
Procurement can help to reduce the exposure to risks from volatile financial markets
What are the characteristics of commodity procurement?
- Volatile and uncertain market conditions
- High sensitivity of price to world markets and political decisions
- Financial market as major driver of prices
What are the types of commoditoes?
Homogeneous goods, closely specified in terms of form and quality
- Hard commodities: Goods extracted by mining (e.g., industrial and precious metals, oil)
- Soft commodities: Goods that are grown (e.g., coffee, wheat)
What is the role of procurement?
- Strategic sourcing to ensure supply availability at certain cost
- Deal with price pressures on finished products (pass-thru vs. absorb)
- Apply appropriate risk management (operational vs. financial hedging)
What are the benefits of “close relationship”? (relationship management)
close relationships increase visibility and transparency throughout the supply chain which improves the firm´s responsiveness to occuring disruptions
What is the commond denominator of “risk mitigation strategies”?
risk mitigation strategies have in common that they are not for free
