05: Risk handling I Proactive (2 - Relationship mgmt + risk tansfer)

Question 1

Intutition behind relationship mgmt and Driving analogy?

Answer 1

• 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

Question 2

What is relationship management about? (high level=

Answer 2

relationship management to manage risk: communicate, collaborate, and share

Question 3

What does relationship management reeduce?

Answer 3

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)

Question 4

What are the two types of relationships?

Answer 4

• inter-organizational
• inter-personal

–>need a lot of time and effort to establish but can be easily destroye

Question 5

What kind of initiatives exist to effectively stabilize suppliers uunder risk?

Answer 5

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

Question 6

Simple idea of risk transfer and hedging? (Formula)

Answer 6

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

Question 7

What is a simple and perfect hedge?

Answer 7

simple hedge: involve two securities with negative correlations

Perfect hedge: remove the undesirable random variable completely (both random variables neutralizes themselves)

Question 8

What are the two methods of risk tansfer?

Answer 8

• insurance
• hedging

Question 9

What is insurance? (def)

Answer 9

is a risk-transfer mechanism that ensures financial compensation for a loss or damage caused by events beyond the control of the insured party

Question 10

What is insurance? (Process)

Answer 10

• 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

Question 11

What is insurance about?

Answer 11

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

Question 12

Example of transportation insurances: losses

Answer 12

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

Question 13

Transpotationn insurance: thefts

Answer 13

• 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

Question 14

What the different forms of business interruption risk?

Answer 14

• property business interruption (BI)
• Contigent Business interruption

Question 15

What is the setting for CBI (Contingent Business Interruption)

Answer 15

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

Question 16

What is “property BI insurances”?

Answer 16

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

Question 17

What are two mechanism that companies are typically exposed to and need to hedge against?

Answer 17

• market price for oil
• foreign exchange rate

Question 18

What kind of risk does foreign exhange rate impose on firms?
(What is single transaction exposure and what is necessary?

Answer 18

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:

1. Cash flow is denominated in foreign currency
2. Cash flow will occur in the future

Question 19

What kind of risk does foreign exhange rate impose on firms?
(operating exposure)

Answer 19

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

Question 20

What can help to reduce the exposure to risks form volatile financial markets?

Answer 20

Procurement can help to reduce the exposure to risks from volatile financial markets

Question 21

What are the characteristics of commodity procurement?

Answer 21

• Volatile and uncertain market conditions
• High sensitivity of price to world markets and political decisions
• Financial market as major driver of prices

Question 22

What are the types of commoditoes?

Answer 22

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)

Question 23

What is the role of procurement?

Answer 23

• 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)

Question 24

What are the benefits of “close relationship”? (relationship management)

Answer 24

close relationships increase visibility and transparency throughout the supply chain which improves the firm´s responsiveness to occuring disruptions

Question 25

What is the commond denominator of “risk mitigation strategies”?

Answer 25

risk mitigation strategies have in common that they are not for free