Managing Your Internationalization and Supply Chain Risks

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Managing Your Internationalization and Supply
Chain Risks
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Whats the greatest RISK facing your company?
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Whats the greatest RISK facing your company?

• Regulations?
• Price Fluctuations?
• Natural Disasters?
• Product Obsolescence?
• Reliability of Suppliers?
• Labour Costs?
• Foreign Exchange fluctuations?
• Plant down-time?

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Whats the greatest RISK facing your company?
the risk profile of companies differ, almost
all the time perceived or real risk what and
how are firms addressing risk?
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In a recent global survey by McKinsey
labour costs, regulatory concerns and
reliability of suppliers ranks as the top risk
concern for many businesses
Source www.mckinsey.com / mckinsey survey 2007
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and even though the risks faced by companies
might change in the future, the amount of risk
faced by companies have been steadily increasing
and will continue to do so
Source www.mckinsey.com / mckinsey survey 2007
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Globalization 3.0 Whats defining business
models today?
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THE WORLD IS FLAT

• Friedman suggests three eras of globalization
• Globalization 1.0 circa 1492 1800
• When the world shrank from a size large to a size
  medium.
• G-1.0 was about countries and muscles, when the
  key agent of change, the dynamic force driving
  the process of global integration, was how much
  brawn how much muscle, how much horsepower,
  wind power, or later, steam power your country
  had and how creatively you could deploy it.
• It was the era when countries and governments led
  the way in breaking down walls and knitting the
  world together, thus driving global integration.

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THE WORLD IS FLAT

• Friedman suggests three eras of globalization
• Globalization 2.0 circa 1800 2000
• When the world shrank from a size medium to a
  size small.
• In G-2.0 the key agent of change, the dynamic
  force driving global integration, was
  multi-national companies (MNCs). These MNCs went
  global for markets and labour, spearheaded first
  by the expansion of the Dutch and English
  joint-stock companies and the Industrial
  Revolution.
• The first half of this era was defined by the
  fall in transportation costs and in the second
  half, by the fall in telecommunication costs.
• It was the era that we saw the birth and
  maturation of a global economy.

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THE WORLD IS FLAT

• Friedman suggests three eras of globalization
• Globalization 3.0 circa 2000 present
• When the world shrank from a size small to a size
  tiny.
• In G-3.0 the key agent of change, the dynamic
  force driving global integration, was the new
  found power for individuals to collaborate and
  compete globally.
• The phenomenon that is enabling, empowering and
  enjoining individuals and small groups to go
  global so easily and seamlessly is called the
  Flat-World Platform.
• The era is defined by the empowerment of
  individuals from all over the world.

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THE WORLD IS FLAT

• Friedman identified ten forces that flattened the
  world
• 11/9/89 The New Age of Creativity When the
  Walls Came Down and the Windows Went Up.
• 8/9/95 The New Age of Connectivity When the
  Web Went around and Netscape went Public.
• Work Flow Software
• Uploading Harnessing the Power of Communities
  (Linux, Blogging, Wikis etc)
• Outsourcing taking some specific, but limited,
  function that was currently done in-house, and
  having another company perform that exact same
  function for you and then reintegrating their
  work back into your overall operations.

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THE WORLD IS FLAT

• Friedman identified ten forces that flattened the
  world
• Off-Shoring is when a company takes one of its
  factories that is operating in one location and
  moves the whole factory to an offshore location,
  where it produces the very same product in the
  very same way, only (usually) with cheaper labour
  and other costs.
• Supply-Chaining the Wal-Mart example of
  real-time inventory and re-ordering process
  linking the stores with suppliers.
• In-Sourcing the UPS example where it provided
  one-stop repair return service for Toshiba in
  the US.
• In-Forming Google, Yahoo!, MSN Web Search
• The Steroids the technologies that are
  amplifying and turbocharging all the other
  flatteners, e.g. wireless Internet

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The world has gone from large to tiny and
business will now have to operate on a 24 x 7 x
7 basis
How does this flattening world phenomenon impact
the way companies compete and strategize? How
does this phenomenon change, if at all, the way a
company views and manage its risks?
24 hours, 7 days a week, over 7 continents
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The complex supply chain seen by the high-tech
product sector will, and have been seen, in many
other industries as the world flattens
Source www.mckinsey.com / mckinsey survey 2007
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How can you better manage your internationalizatio
n and supply chain RISKS?
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Some of the measures used by companies to
minimize or mitigate the risks include
Source www.mckinsey.com / mckinsey survey 2007
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For those that do make the effort, different
companies will take different approach towards
managing their risks, e.g. centrally, at the
business unit level etc
Source www.mckinsey.com / mckinsey survey 2007
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Understanding RISK
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• The Business of Business is Business
• Milton Friedman
• Alfred P. Sloan

The corporate objective of any firm and
organization is to increase the value of the
firm/organization and deliver value to customers
but with as little risk as possible
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The corporate objective of any firm and
organization is to increase the value of the
firm/organization and deliver value to customers
but with as little risk as possible
The value (i.e. its profitability, share price
etc) of a firm is largely determined, by three
factors

• Business objectives

Value

• Operations / Processes

• Strategies

These three factors also impact the way a firm
delivers value to its customers
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The corporate objective of any firm and
organization is to increase the value of the
firm/organization and deliver value to customers
but with as little risk as possible
On the flip side, it is also true that the very
same factors that impact the value creation
aspect of a firm, also determines the overall
risk that a firm faces
Business Strategies
Business Objectives
Business Processes
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The corporate objective of any firm and
organization is to increase the value of the
firm/organization and deliver value to customers
but with as little risk as possible
? Revenues Costs
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The corporate objective of any firm and
organization is to increase the value of the
firm/organization and deliver value to customers
but with as little risk as possible
? Revenues Costs
Sales, Dividend, Interest, Income from abroad

• Cost of Goods
• Manpower Costs
• Operating Costs
• Borrowing Costs
• Transaction Costs
• .

To increase the value of a company, the basic
objective is to ensure, as far as possible, that
revenues increase rather than decrease...
Sources of sales, income, dividend, etc
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The corporate objective of any firm and
organization is to increase the value of the
firm/organization and deliver value to customers
but with as little risk as possible
? Revenues Costs
Sales, Dividend, Interest, Income from abroad

• Cost of Goods
• Manpower Costs
• Operating Costs
• Borrowing Costs
• Transaction Costs
• .

and to ensure, as far as possible, that costs
are kept in check and decreased.
Sources of sales, income, dividend, etc
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The corporate objective of any firm and
organization is to increase the value of the
firm/organization and deliver value to customers
but with as little risk as possible
How can a business ensure it increases its value?
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The corporate objective of any firm and
organization is to increase the value of the
firm/organization and deliver value to customers
but with as little risk as possible
It should first seek to understand the RISKS that
can possibly make everything go wrong
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The corporate objective of any firm and
organization is to increase the value of the
firm/organization and deliver value to customers
but with as little risk as possible

• Risk assessment is not just about a companys
  ability to pay or remain solvent, but also the
  ability to perform a task at a level deemed
  satisfactory to the company

• and managing risks should be a dynamic exercise
  done frequently and based on as much quantitative
  and qualitative business intelligence as possible.

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Example In making a Market Entry
decision-making, the types of risks a firm faces
can be differentiated into seven types

• Activity Risks
• Co-ordination Risks
• Industry Risks
• Institutional Risks
• Monetary Risks
• Country Risks
• Global Market Risks

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Example Firms already in the market face the
following risk profile
Total Risk Profile
Country Associated Risk
Project Associated Risk
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RISK Mapping An effective tool to assess and keep
tabs on a firms risk exposure
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What is Risk Assessment?

• Risk assessment should occur at all stages the
  suppliers, the logistics companies, the
  distributors and customers.

• One aspect of risk management is to ensure that
  no one company in the supply chain has a major
  impact on a firms profits, e.g. one customer
  accounting for 50 of sales.
• Ideally, a company should have more than 1
  supplier and logistics provider serving a diverse
  base of customers.

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Risk Mapping
Why use a Risk Map?

• A Risk Map shows the risks faced by a company. A
  Risk Map can be drawn for
• Customers (using debtor list)
• Suppliers (using the creditor list)
• Logistics Suppliers (using the creditor list)
• Benchmark suppliers, logistics suppliers and
  customers
• Benchmark own company against competition
• Overall Risk Profile along (1) Market/Country
  lines, (2) Customer base, etc

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Risk Mapping
Risk Mapping Identifying, Mapping Managing
Business Risks

• What is Risk Mapping?
• Risk mapping has its origins from the insurance
  sector. However, the approach and concept is
  highly applicable to business operations in
  general.
• Risk mapping is the exercise that enables a
  company to catalogue and quantify the impact of
  the variety of risks it faces.
• It is very much an art and not a science.

• Where does Business Intelligence come in?
• Once the risk map has been drawn, a company is
  able to pin-point the business intelligence it
  requires to minimize or reduce those business
  risks.

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Risk Mapping
Risk Mapping Identifying, Mapping Managing
Business Risks
What sort of risks do businesses generally face?

• Externally Driven
• Interest Rate changes, Foreign Exchange
  fluctuations, Creditor defaults
• Competition, Customer changes, Industry changes,
  Demand changes
• Government regulations, cultural changes,
  Organizational change
• Natural disasters, Supplier defaults,
  Environmental changes

Source AIRMIC, ALARM, IRM, 2002
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Risk Mapping
Risk Mapping Identifying, Mapping Managing
Business Risks
What sort of risks do businesses generally face?

• Internally Driven
• Liquidity and cash flow issues
• Research Development, IP issues
• Accounting control failure
• Information Systems failure

Source AIRMIC, ALARM, IRM, 2002
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Risk Mapping
Risk Mapping Identifying, Mapping Managing
Business Risks
Source AIRMIC, ALARM, IRM, 2002
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Risk Mapping
Risk Mapping Identifying, Mapping Managing
Business Risks

• The Risk Map typically consists of
• A 3 x 3 grid

• The x-axis measures the severity of impact to
  profits

• The y-axis measures the frequency or likelihood
  of events occurring

Events are risk factors that can or will occur,
e.g. buyer defaulting on payment
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Risk Mapping
Risk Mapping Identifying, Mapping Managing
Business Risks
Translating the Internationalization Risk Factors
into events

• Activity Risk
• Workforce Issues (e.g. hiring)
• Operational Issues (e.g. embezzlement)
• _
• _

• Co-Ordination Risk
• Supplier issues (e.g. quality problems)
• Buyer Issues (e.g. default in payment)
• Channel Issues (e.g. shipping problems)
• _

• Industry Risk
• Pricing Issues
• Demand issues
• Regulatory Issues (Regulations change)
• _

Low
Medium
High
Severity of Impact to Profits
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Risk Mapping
Risk Mapping Identifying, Mapping Managing
Business Risks

• Activity Risk
• Workforce Issues (e.g. hiring)
• Operational Issues (e.g. embezzlement)
• _
• _

• Co-Ordination Risk
• Supplier issues (e.g. quality problems)
• Buyer Issues (e.g. default in payment)
• Channel Issues (e.g. shipping problems)
• _

Plotting the events in the Risk Map

• Industry Risk
• Pricing Issues
• Demand issues
• Regulatory Issues (Regulations change)
• _

Low
Medium
High
Severity of Impact to Profits
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Risk Mapping
Risk Mapping Identifying, Mapping Managing
Business Risks

• The key to this exercise
• Understand your risk profile of the market you
  are entering
• Establish a BI system that will help you to
  monitor the High Impact risk you are facing
• Constantly find ways to lower your risk

Low
Medium
High
Severity of Impact to Profits
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Risk Mapping
Risk Mapping Identifying, Mapping Managing
Business Risks
Guiding Principles to manage risks
You cannot eliminate risk but you can reduce and
limit the exposure!
Low
Medium
High
Severity of Impact to Profits
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Risk Mapping
Risk Mapping Identifying, Mapping Managing
Business Risks

• Risk mapping is not a one-time effort. Business
  and economic environments change, as do their
  impact on the company.
• Core business risks may disappear or change in
  magnitude. Non-core risks may one day become
  core risks. Subsidiaries are bought and sold.
  The risk map of the firm is NOT static.
  Management should re-evaluate its risk map
  regularly. Once the risk map has been built, the
  re-evaluation should be more straightforward.
• Risk mapping, if it is to be meaningful, should
  be as dynamic as the world in which the
  corporation operates.

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Implementing a Business Intelligence solution to
Manage Risks
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Business Intelligence
Every organization collects BI The question is
what and how much is being accumulated?
? Probably NOT!
? NO!
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Business Intelligence
Business Intelligence is critical for decision
making and to reduce business risksbut how much
is enough?
Risks are reduced by having intelligence on
the customer, the operating environment and your
competitors.
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Business Intelligence
How does a company know what to collect?
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Business Intelligence
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Business Intelligence
Value
Internal
External
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Business Intelligence
The key issue in business intelligence is not
about the amount of BI you have but the relevance
of the BI within your organization
Business Intelligence, or simply BI is the
process of getting sufficient amounts of the
right information in a timely manner, then
transforming the information into a usable form
that can be proactively used to have a positive
impact on business strategy, tactics and
operations.
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Business Intelligence
The end objective is to have sufficient amount of
the right information and insights to reduce risk
and limit your firms risk exposure.
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The Average Risk
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The Average Risk
Companies with strong revenue growth and high
shareholder returns do not only execute well but
also almost always compete in the right sectors
or segments at the right time
This often means that companies need to take a
granular approach towards how it assess a
market as well as how it assess its own
success. Relying or using averages to make
decisions can be deceptive
Source www.mckinsey.com
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The Average Risk
Source www.mckinsey.com
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The Average Risk
Consider the disguised case of GoodsCo. At the
corporate level the company delivered stable,
albeit slow, growth from 1999 to 2005. MA
drove almost all of the companys growth in the
United States, however in Europe positive
exchange rates propelled modest growth. Organic
revenues rose strongly only in emerging markets,
such as Africa, Latin America, and the Middle
East.
Source www.mckinsey.com
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The Average Risk
The story gets more precise as we disaggregate
the companys performance on the three growth
drivers in 12 product categories for five
geographic regions. No fewer than 27 of the 47
segments the company competes in register as poor
in terms of their performance. Unfortunately,
these segments represent 87 percent of GoodsCos
sales. On the positive side, 20 segments are
good or great, but they make up only the
remaining 13 percent of sales. And although a
promising growth story is developing in Latin
America in most segments, the business is
performing poorly in its core ones in Europe and
North America. It cannot claim exceptional
performance in any segment
GoodsCo has a portfolio problem! ..and it needs
to addresses the issues at the granular level.
Source www.mckinsey.com
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In conclusion the reality is that companies are
not doing enough in the area of managing
internationalization and supply chain risks
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Only 9 are confident of managing the risk
effectively. One reason cited was that there
were too many risks and too little time.
Source www.mckinsey.com / mckinsey survey 2007
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Despite knowing the risks, companies are making
little use of tools to help them assess the
business landscape and manage their risks more
effectively
Source www.mckinsey.com / mckinsey survey 2007
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For most organizations, the lack of a consistent
risk management framework leaves a lot of
important and timely information trapped in
documents and in people's heads. Effective
information management not only helps make
business operations more efficient, but also
mitigates risk
Thank You