Risk Management in Global Supply Chain

Introduction

Companies and businesses can face many challenges when exporting their services and products. There are several risks which businesses need to consider. They need to identify the risks, make a plan how to solve them and come up with different kind of solutions. That’s all part of global business nowadays. 

What are the factors that force risk taking?

Whether we like it or not, risk is an integral part of life. Some people may view it as a challenge that may lead to improvement or success, while others see it as a reckless activity. In business, entrepreneurs associate risk with potential danger or loss, but true entrepreneurs take risks. Most successful businesses took great risks not because they were reckless but because it’s the only step to take to move forward. As customers’ demands change, so should the products or services that a business offers. Thus, it’s necessary for business leaders to come up with new and innovative ideas to keep up with the changing times. Continue to change for the better with new and fresh ideas, that’s the only way to be innovative. While tossing in something new is quite uncertain, it will help you move forward and see what will work and what will not. (Sarigumba n.k.)

For example, Microsoft would not have made it at the forefront of the gaming industry if not for their iconic gaming console: the Xbox. In 2001, when the Playstation seemed to dominate the gaming console market, Microsoft decided to go up against it with Xbox. This is not only the risk they took, but also they spent twice as much of their marketing budget. Now, Xbox has become a staple for console gaming, already on its 3rd generation unit with the Xbox One, and has sold more than 24 million units in 2016. Another good example is Google – while studying for a Ph.D., Google co-founders, Larry Page and Sergey Brin almost gave up on running their start-up company because it takes too much of their time. In fact, in 1997, Page almost sold it for $1.5 million. Today, their company is already among the most valuable companies in the world, and perhaps their product is the most relevant thing on the internet right now.  Had they given up, the internet wouldn’t be as convenient as it is now. (Sarigumba n.k.)

How to identify the risks in export business?

Exporting can be a risky business. Operating in an unfamiliar, foreign market will always throw up new challenges to navigate, however established a business may be in its domestic market. The difference between success and failure when doing business overseas is being prepared. There will always be risks when entering a new market but identifying those risks ahead of time and putting measures in place to manage those risks can help to minimize their impact on the success of your business overseas. (Export Finance Australia n.k.)

According to Export Finance Australia, export risks can be quite different depending on which country your business is exporting to. However, there are common risks all business should be aware of when doing business in international markets:

  • Political risks. An uncertain political environment can hamper export operations in a number of ways. A trade embargo could affect delivery of goods, civil war or political violence could affect the safety of your staff and partners. Political instability could result in defaults on payments, confiscation of property and assets, and blockages in transfer of earnings.
  • Legal risks. Legal requirements and processes can vary significantly across different markets, so conduct research and receive legal advice to understand your legal position. Some common areas of difference, includes: local contract law, patent registration and IP requirements, product liability laws, dispute resolution processes and operational health and safety laws.
  • Operating risks. Exporters need to become familiar with the operating environment of new markets. Some important things to look out for are industrial relations policies and practices, permitting rules and import requirements.
  • Currency exchange risk. When the currency of the seller and the buyer are different, any change in the exchange rate has negative effects on one of the two actors. If the sale is made with the currency of the buyer, the risk is supported by the seller who can see the benefits of the sale melting due to devaluation of the currency of the customer. The evolution of the exchange rate can have several economic and political backgrounds that are not necessarily predictable. (Credit Tools n.k.)

Example with the realization of a business between the seller “Elec” based in France and a buyer “MT” in Great Britain:

Case amount : 10 000 GBP or 11 976 EUR.

The exchange rate is 1,1976 EUR for 1 GBP.

Immediate delivery and billing of 10,000 pounds per Elec the March 25th. The bill has a due date of May 15th.

If the 15th of May, the exchange rate is 1,08 EUR for 1 GBP, the amount of 10,000 pounds paid by MT is 10 800 euros only, which generates a loss of 1,176 euros for Elec. (Credit Tools n.k.)

How to mitigate/reduce risk in export driven business?

Fortunately, there are many resources available to help mitigate risks when exporting. 

According to BDC, avoiding economic and financial risks:

  • Buy credit insurance to protect against a range of risks including customer bankruptcy or non-payment, contract cancellation, issues with currency conversion or transfer, and more.
  • Diversify your export markets. If you export to 10 markets instead of one, you can shift your efforts to other markets when one goes through a downturn.
  • Understand the types of foreign exchange risks that you may face in global markets and how to measure your exposure. Fluctuations in currency exchange rates can take a large bite out of your profits.

To help avoid social risks, ensure that you and your employees are well versed in spotting signs of potential corruption and terrorist financing and have a plan in place to deal with these risks.

While no one can accurately predict when and where political events may disrupt trade, buying political risk insurance can help protect your assets from a number of political risks. (BDC n.k.)

According to Export Finance Australia:

  • Seek advice. Your bankers, lawyers, insurers and accountants will be able to give you advice about the risks you may encounter in overseas markets. It is also a good idea to try and find someone who has dealt in the country before so you can learn from their experiences – you may be able to find such an organisation through your industry association or business chamber.
  • Make an assessment. While it is impossible to predict the occurrence of specific risks, it is possible to make a reasonable assessment of the likelihood and impact of most scenarios that could affect your business. You should also rank the likelihood and importance of different risks to identify critical areas of focus.
  • Develop risk management strategies. As with any other business risk, you then need to identify the steps you can take or measures you can put in place to avoid or mitigate the risk or minimize its impact. Ensure your risk management strategy is as clear and simple as possible, and that everyone in the business is aware of what they need to do. It’s also important to regularly monitor the risks that have a potential to affect your business, as the likelihood of impact may change over time.

Risk is an inherent part of doing business overseas. Different countries will have different risk profiles and it is important that you fully understand the risks associated with the markets you are operating in, and plan for them. A solid risk management strategy will help you mitigate risks and minimize the impact they are likely to have on your business. (Export Finance Australia n.k.)

To go forward and grow as a company, taking risks might be worth it. Once you identify risks carefully and really take all possible factors under consideration – being prepared what and if something goes wrong you will have solutions for that kind of situations – you are all set to take that maybe well-needed risk. Bigger the risk, better the profits.

References

BDC – Business Development bank of Canada. N.k. 3 common risks to guard against when exporting. URL: https://www.bdc.ca/en/articles-tools/marketing-sales-export/exportation/pages/common-risks-guard-against-when-exporting.aspx

Credit Tools. N.k. Manage risk in export business. URL: https://www.creditmanagement-tools.com/manage-risk-in-export-business-c8.php

Emadrahim. 2016. The benefits of risk management planning. URL: https://pmcenter.bellevue.edu/2016/06/19/the-benefits-of-risk-management-planning/. Accessed: 19.6.2016.

Export Finance Australia. N.k. Four risks for exporters – and how to overcome them. URL: https://www.exportfinance.gov.au/resources-news/news-events/latest-news/2017/april/four-risks-for-exporters-and-how-to-overcome-them/

Sarigumba, R. N.k. Reasons Why Companies Should Embrace Taking Risks. URL: http://www.iamwire.com/2017/04/reasons-why-companies-should-embrace-risk-taking/151742

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