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The Yin and Yang of Inflation

inflationpicInflation like all risk is a double edge sword. Its negative nature will upset the apple cart and pose uncomfortable challenges for SME managers that have grown accustomed to the status quo.

It will force managers to reconsider their well conceived business plans and perhaps more closely scrutinize this quarters PL or the company balance sheet. It will present serious challenges for businesses supply chain and client relationships. It may raise the eyebrows of your shareholders and credit providers perhaps provoking some pointed questions concerning your management skills and the validity of your business model.

That said inflation does have an upside. Like all risk factors it has the potential to create opportunities. Inflation will drastically alter market conditions. It will reveal inefficiencies that nimble SME can actively engage and manage to turn those market conditions to their advantage. The key operative words are management, intentionality and active engagement.

Inflation is a silent killer. It stalks all SME threatening to gobble up product margins, revenue opportunities and bottom line profits. It diminishes customer buying power and may threaten the solvency of large customers and suppliers. It drives up the cost of capital, making credit more expensive while it forces state and local governments to raise taxes and fees.

The inflation bogey man lurks in the profit and loss statements of all businesses with SME being particularly vulnerable to its effect. Inflation dramatically shows itself on the expense side of the ledger in the increases for basic materials, energy, delivery services, TE, administrative expenses and employee benefits. Inflation also affects the income side of the profit loss statement. It erodes the buying power of your customers and threatens collection of receivables by extending days outstanding, increased write offs or the sale of uncollected debt for pennies on the dollar.

SME profitability is particularly sensitive to the effects of inflation because of economies of scale, concentration of risk factors and lack of pricing power.

Many SME lack pricing power. Pricing power suggests that if price of a product rises to a certain level demand for that product will not diminish. For a SME to have pricing power it must offer value add product to dependent buyers. Its product or service cannot be easily replicated or widely available from other sources.

While pricing power escapes most SME numerous factors inhibit their ability to become low cost producers. They deliver product or service differentiation to their customers by other means then low price. Inflation erodes consumer purchasing power driving buyers to seek low cost producers. In this environment SME may suffer when buyers trade down to low cost providers. Key customers may compel SME to lower prices to be more in line with lower cost producers. This is a major threat to SME.

SME tend to have greater risk concentration in their business model. Heightened risk concentrations are most pronounced in small businesses due to a limited product line, geographical risk, market cyclicality and in client and supply chain relationships. Consider a small manufacturer of finished steel products for the home construction industry. Generally, manufactures profitability is highly correlated to the price it pays for basic commodities and has an extremely high concentration of supply chain and product risk. Small businesses may not be able to recover or adjust its product prices to cover increased commodity prices due to existing contractual agreements with customers or its lack of pricing power. The abatement of market demand due to a recession may provoke larger customers to demand price concessions by threatening to move their business to lower cost producers. The pressure on this small manufacturer is compounded by a spike of smaller account losses and moribund demand due to weak cyclical market conditions in its target market.

It’s almost a perfect storm of negative business conditions. Small businesses managers need to understand how inflation touches all aspects of their business and must manage its impact to maintain profitability and sustainable growth.

Managing Inflation Risk with a WIN Campaign

SME can meet the challenge of inflation head on by implementing a Whip Inflation Now (WIN) program that engages the numerous risks inflation poses. In deference to our former President Gerald Ford, business managers can initiate WIN Programs and actions to temper the impact of inflation and to seize opportunities that rapidly changing market conditions create. Small businesses must be extra vigilant and proactive in managing all classes of business risks.

Some small businesses will cave into the demands of their large accounts to cut prices to prevent them from going to a lower cost provider. This is very dangerous for small businesses and can result in “death by a thousand cuts.” Managers should not wait for their largest account to approach them seeking price concessions. Now is the perfect time to go on the offensive and alter the value proposition that only your firm can uniquely deliver to key accounts. Remember your largest accounts are experiencing the negative effects of inflation as well. Go to them and propose a WIN Campaign.

A company’s WIN Campaign can offer a joint marketing program using advanced web enabled technologies. Your WIN Campaign can implement an expanded training and support program tied to a business development program or supply chain rationalization. You may suggest a partnership to develop a new product or put in place a customer loyalty program. Your job is to create a unique value proposition that adds value to your product and convey it to your customer so they cannot commoditize your product. Together you and your clients can WIN the fight against inflation and turn it into a business development initiative. Your clients will appreciate the fact that you are thinking about their business success.

Another common knee jerk reaction to fight rising business costs is to reduce expenses by cutting expenditures on areas that do not support the mission critical functions of the business. Capital is allocated to maintain funding to support sales, production and product delivery. This is coupled with a lean administrative management structure and this model is seen as a recipe for economic survival. Being good stewards of corporate capital is essential during these times. Capital leakage is always a threat to business profitability and needs to be even more diligently managed during times of economic duress. But this strategy is a subsistence survival strategy. It is based on investing the barest minimum of capital to address fluctuating market conditions. This strategy may limit small businesses ability to literally capitalize on opportunities that changing market conditions present.

Cutting expenses for marketing is usually another budget casualty when businesses look to cut costs. This will reduce your current expense line for this quarter and will certainly help bottom line profitability; but skipping this year’s trade show will not help you to locate that new customer who is looking for a supplier because his current provider is struggling with product quality issues. Cutting this expense won’t provide you with the critical insights you need to stay competitive and ahead of new market entrants that are attending trade shows. Who by the way are also aggressively courting your largest account to get just a tiny slice of your business to demonstrate their “superior value proposition.”

Employee benefits and training is another area that is often the focus of budgetary cutbacks. Many SME need to closely consider the gains they will realize by cutting back on benefits offered to its employees. Cutting benefits could increase employee turnover. Training and hiring new employees are an expensive proposition for SME. The loss of key employees can potentially devastate a small business. Expertise, intellectual capital and critical business intelligence leaves the organization when a key employee walks out the door. This is doubly true if some key employees leave the firm and walk some major client relationships out the door with them.

SME can also try to employ risk transfer strategies. Insurance purchases may help in some areas but to fight inflation small businesses can use financial instruments (capital permitting) to hedge against rising prices. The purchase of TIPs, FX forward contracts, commodity or energy futures can help to offset the negative effects of key inflation business threats. As the price of oil rose this summer a modest equity position in oil or other energy company would have helped to offset the increase in energy expenses.

Thankfully adverse economic conditions will force SME to take an honest look at their product lines and business model. Economic adversity provides an opportunity for management to make hard decisions concerning product lines. This is an ideal time to focus and fund the development of products that offer the greatest potential for long term profitability and sustainable growth.

Inflation is a significant problem for small businesses but it is a problem that can be managed. Changing economic conditions alter the landscape for all businesses that accelerate and starkly reveal market inefficiencies. These inefficiencies create market anomalies and opportunities that astute small business owners and managers can capitalize on through an intentional practice of a risk management and opportunity discovery program.

Sum2’s objective is to assist clients to implement corporate sound practices that enhance profitability and sustainable growth. Sum2’s offers a wide stable of risk management apps for SME. The Macroeconomic Risk Assessment App helps managers review macroeconomic and event risks to better manage its potential effect on their business. Sum2 offers a Macroeconomic Risk App and can be downloaded from Google Play or by visiting www.sum2.com or by calling us at 973.287.7535.

risk: #sme, #inflation, #macroeconomic, #supplychain #office365, #mobileoffice, #metasme, #smeiot #eventrisk, #marketrisk, #WIN, #sum2

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July 21, 2014 Posted by | banking, commerce, economics, inflation, marketing, metasme, SME, Sum2, supply chain | , , , , , , , , , | Leave a comment

A Growing Contagion: One in Seven Companies Are a Credit Risk

contagion1-450The H1N1 Swine flu threat may be the big topic on CNN but a growing contagion of financial distress is widely infecting small and mid-sized enterprises (SME) with potentially fatal consequences.

CFO magazine reports that 14% of companies are struggling to pay their bills or are at risk for bankruptcy. These findings are the result of a study CFO conducted on 1500 Midcap companies. The 2009 Credit Risk Benchmarking Report indicated that 550 companies of the 1500 made the credit watch list and over 200 of the names were in or are entering a distressed financial condition.

The report measures each company on three factors: cash as a percent of revenue, days payable outstanding (DPO), and DPO relative to the DPO of that company’s industry. The last of these measures is intended to expose which companies are under performing regardless of the economic condition of their industry as a whole. A company scoring low in all three areas is rated a potential credit risk.

The strain of a two-year recession and limited credit access is taking its toll on small and mid-sized businesses. This development is not surprising. The recession has hurt sales growth across all market segments. Banks, still reeling from the credit crisis are still concerned about troubled assets on their balance sheets. Bankers can’t afford more write downs on non-performing loans. Banks remain highly risk adverse to credit default exposures and have drastically reduced credit risk to SMEs by shutting down new lending activity.

Reduced revenue, protracted softness in the business cycle and closed credit channels are creating perfect storm conditions for SME’s. Bank’s reluctance to lend and the high cost of capital from other alternative credit channels coupled with weak cash flows from declining sales are creating liquidity problems for many SMEs. As a defensive maneuver, SMEs are extending payment cycles to vendors to preserve cash. This same cash management practice is also being employed by their clients resulting in an agonizing daisy chain of liquidity pain. SME’s that have concentrated exposures to large accounts are at the mercy of the financial soundness of few or in some instances  a single source of revenue.

The growing contagion of financial distress is also a major threat to supply chains. Buyers might prize their ability to drive hard bargains with their suppliers but the concessions won may be the straw that breaks the camels back driving a supplier into insolvency.

It is critical that managers understand all risks associated with clients and suppliers. It is critical that managers assess risks associated with client relationships and key suppliers. In this market, enhanced due diligence is clearly called for. The financial soundness of suppliers and clients must be determined and scored so as to minimize default exposures to your business.

CreditAides is a company that delivers  SaaS based financial health assessments on SMEs.  CreditAides reports that their clients are becoming more vigilant and thorough  in their due diligence of customers and suppliers.  They have noted a particular emphasis on the growing practice of reviewing the financial health of suppliers.  Supply chain risk is a heightened risk factor for SME’s due to their over dependence on single source.  Conducting a financial health assessment on key suppliers and other enhanced due diligence practices mitigates a risk factor that could have potentially devastating consequences.  SME manager’s need to button down their due diligence practices  to prevent the sickness from infecting their business.

CreditAides SaaS can be accessed here: www.CreditAides.com

You Tube Music Video: Bing Crosby and Rosemary Clooney,  Button Up Your Over Coat

Risk: contagion, credit risk, counter-party, supply chain, client, recession, banking

October 9, 2009 Posted by | banking, business, commerce, credit, credit crisis, economics, recession, risk management, SME, supply chain, sustainability | , , , , , , , , , , , , , , , , , , , , , , | 4 Comments

Politicians Get Wind of Contaminated Drywall

chinese-drywall-inspection

As reported on this blog back in February, the problem of contaminated drywall residential home developers, suppliers  and construction companies imported from China for new home construction is growing and the issue is beginning to raise a stink in Washington.  Senators from a number of states are fuming about the extent of the problem.  The use of contaminated drywall in new home construction spans many states.  Florida in particular is reported to be severely effected by this product liability event.  It is estimated that contaminated drywall was installed in over 35,000 homes. Risk mitigation experts believe that it would cost approximately $100,000 per home to remove, dispose and replace  the drywall.  Developers, banks, construction companies and consumers still reeling from the recession and credit crisis would be hard pressed to meet that huge expense.

The problem of contaminated drywall has many dimensions.  It is a product liability issue, ecological hazard and has dramatic contagion capabilities that can effect financial solvency, community quality of life and international trade relations with China.  At its root, the issue of contaminated drywall is a dramatic example of the severity of  the consequences of a poorly managed supply chain.  See our post For the Want of a Nail: Lennar Homes.

The Biz Journal Article can be read here: Senators Outraged Over Chinese Drywall.

More information on Chinese drywall contamination from NACHI

May 29, 2009 Posted by | environment, manufacturing, product liability, recession, reputational risk, supply chain, sustainability | , , , | 1 Comment

Managing Infuenza Pandemic Risk

pandemicThe Swine Flu outbreak carries with it the potential to severely damage the financial health of small and mid-size enterprises (SMEs). Left unmanaged pandemics can impair profits, generate losses, undermine the contribution of key employees, disrupt supply chains, halt operations, undermine an enterprises financial health that can ultimately lead to bankruptcy.

Though many consider pandemics as a force majeure risk event that cannot be controlled, businesses can take steps to mitigate and manage the drastic challenges a pandemic can pose to a business. This is particularly important for businesses that find themselves in a weakened position due to the recession. Businesses that have become highly stressed due to the current business cycle are at acute risk of becoming insolvent due to the shock of this potentially catastrophic risk event. Business managers, bankers, shareholders and businesses with extended supply chains need to take steps to manage and mitigate the sever effects of pandemic risk.

The first step is to create or update a business continuity plan. Business continuity plans need to address a range of issues that includes planning for disasters and planning for the unique risk factors of an influenza pandemic need to be integrated into business processes.

All businesses are unique. Addressing a pandemic risk event in your business plan will require you to conduct a risk-management assessment on all aspects of your operations, business processes and market impact to ensure continued operation and financial health.

Some things management must consider in its review are:

  • Assess how you work with employees, customers, contractors to minimize contagion threats
  • Determine mission critical business functions your business requires to maintain operations
  • Stress test your business operations to determine how to function with up a 40% absentee rate
  • Review inventories in case foreign or domestic suppliers and transport services are interrupted
  • Review your supply chains, determine at risk suppliers and identify backups
  • Reorganize work spaces to minimize the spread of the disease
  • Equip employees to support telecommuting
  • Develop communication strategies to inform employees, customers and the media
  • Use this opportunity to expand your e-commerce capability
  • Promote awareness of the problems associated with pandemic flu
  • Alert employees about what steps you’re taking and what they can do to limit the pandemic’s impact
  • Review sick-leave and pay policies to ensure they don’t discourage workers from staying home when they’re ill
  • Make backup plans if you need to pull people out of countries where the epidemic strikes
  • Develop a travel policy that restricts travel to areas where the virus is active
  • Stock up on masks and sanitizers, and consider staggering work hours to limit the size of gatherings

Sum2 publishes the Profit|Optimizer product series.  The Profit|Optimizer is the leading SME risk management platform that helps business managers and business stakeholders quickly assess enterprise risk factors and take considered action to mitigate and manage those risk factors. Sum2 will be releasing a pandemic risk assessment module by the close of this week.  The product will retail for $95.00 and will assist SME’s to assess, mitigate and manage the threats posed to their business by pandemics and other social disasters.

More information can be found on our website www.sum2.com.

Sum2 help our clients assess risk and realize opportunities.

April 30, 2009 Posted by | business continuity, disaster planning, recession, risk management, Sum2, supply chain | , , , , , , , , , , , , , , , , , | Leave a comment

PCA Goes To The Lonesome Valley

PCA RIP

PCA RIP

On Monday came the not surprising news that Peanut Corporation of America (PCA) has filed for bankruptcy.

The practice of selling food additives laced with salmonella bacteria makes it difficult to win back the trust of customers that had been so grievously violated.

PCA’s actions to knowingly ship contaminated products that have resulted in nine deaths and have sickened 637 people in 44 states. PCA’s salmonella laced peanut paste has contaminated 2,226 processed food products. A full list of recalled products can be found on the FDA website. These potentially criminal acts by PCA’s management has demolished the PCA corporate brand making it impossible to continue as a going concern.

The Chapter 7 bankruptcy filing will liquidate the company. This strategy will protect the PCA shareholders in the privately held firm from the significant legal liability that this event has created. It does not however protect PCA’s company management and accomplices that knowingly shipped contaminated products from potential criminal prosecution. Criminal persecution of those involved should be pursued and if anyone is found guilty punishment must be severe.PCA released its contaminated product into a large and extensive supply chain. Many leading brand food processing manufacturers that use PCA’s peanut paste as an ingredient in their packaged goods products have suffered severe reputational damage to their product and company brands. Though PCA’s corporate liability may be mitigated with the bankruptcy filing, aggrieved consumers will continue to have have legal recource by filing suits against the major consumer product companies that are still in business. This could make for a record breaking class action product liability suit.

Unfortunately this tragic occurrence could have been prevented. PCA’s actions demonstrate a disturbing ambivalence toward effective sound corporate governance practices. Companies that willingly sacrifice risk management and ethical business practices for the sake of short term profits consistently undermine corporate sustainability. All may not result in a dramatic corporate implosion like PCA. But ultimately the song of corporate liquidations remains the same. Unemployment for workers, aggrieved consumers, community desertion, tortured consciences and and in some instances criminal prosecution.

RIP PCA.

You Tube Video: Fairfield Four, Lonesome Valley

Risk: corporate goverance, ethics, risk management, legal

February 18, 2009 Posted by | associations, compliance, manufacturing, Peanut Corporation of America, product liability, supply chain, sustainability | , , , , , | Leave a comment

For the Want of a Nail: Lennar Homes

for the want of a nail

for the want of a nail

Community developer Lennar Homes lawsuit against drywall manufacturers reminds me of the old Mother Goose nursery rhyme, “for the want of a nail.” The rhyme begins with a nail that was not available to affix a shoe to the hoof of a horse. The loss of the nail loses the shoe, which loses the horse, which loses the rider, which loses the battle, which loses the war, which loses the king which loses the kingdom. For the want of a nail is an instructive tale of how seemingly insignificant or minute events can create consequences that escalate into a catastrophic incident that impacts and endangers many.

The Lennar lawsuit is yet another egregious example of supply chain contamination that has recently come to light. The discovery of toxic substances within drywall manufactured in China and used in the construction of Florida homes has prompted the lawsuit against manufacturers and a number of installation subcontractors that purchased the contaminated drywall on behalf of Lennar.

Lennar’s lawsuit alleges that subcontractors it employed to install dry wall, substituted high quality domestic brands with the less expensive contaminated drywall. The subcontractors imported the contaminated drywall from China to save on costs of materials in an attempt to boost profits for their contracted work. The drywall was discovered to contain toxic substances after a number of homeowners began to complain of foul odors, product deterioration and in some cases sickness due to exposure to the contaminated product.

It is believed that the Chinese drywall was found to contain a quantity of dry ash which was used as a filler substance in the manufacturing process. Dry ash is a waste by product of coal fired power plants that are so prevalent in China. The dry ash is known to contain concentrations of heavy metals that are considered dangerous to humans.

This event is certainly unwelcome news for the beleaguered construction and real estate industries. Particularly so in deeply distressed markets like southern Florida. It has heightened the risk profile of all parties involved and could spell catastrophic consequences for some of the involved manufacturers, homeowners, and contractors. This event can also impact the profitability of banks that may be forced to write off non-performing mortgages and construction loans sold to affected homeowners and contractors. Insurance companies may be required to pay off clams for product liability and homeowner policies. Municipalities are also at risk due to this event. Tax ratables and property values are threatened due to property abandonment and the suspicion that toxins have been introduced into the community.

This risk event will require the drywall manufacturers to face severe legal liability. It will impact profitability due to the financial stress of remediation expenses. Most significantly these types of events do severe damage to the company brand and reputation. A great deal of company and product branding is about trust. This types of events compromise the trust of brand consumers. Once that trust is violated it is very difficult to win it back.

Lennar violated its customers trust by allowing its supply chain to be contaminated. This violation of trust will result in financial loss and may create a long term health risk for Lennars customers and their families.

The municipalities that welcomed Lennar with the anticipation that development will serve the citizens of their communities have now been scarred by an ecological hazard. This will continue to haunt the reputation of these towns for many years because it threatens the value of both contaminated and non contaminated homes.

The drywall installation contractors face a high probability of bankruptcy and potential criminal prosecution. This event will fire a deepening distrust of Chinese manufactured products. It will certainly add stress to the delicate political balance of the highly codependent China USA trade relationship. Instigating calls for more protectionism and “Buy America” mantra by American based manufacturers. The prospect of added strain with China is particularly delicate due to China’s important roll in financing government spending through its large purchases of US government bonds. All because some subcontractors wanted to realize a little more profit margin. For the want of a nail indeed.

The unfortunate realization is that this risk could have been prevented. Master contractors need to put in place service and supply level agreements that prohibit the use of substituted materials. Master contractors need to manage supply chains by insisting that all materials used by subcontractors meet quality specifications and are sourced from trusted and thoroughly vetted providers. Adherence to international product quality and testing standards must be ascertained before those are accepted into the supply chain. This is just one aspect of ascertaining weather a supplier meets acceptance criteria into a company supply chain.

The Profit|Optimizer helps manufacturers, developers, contractors and lenders conduct a risk assessment of their supply chain. It is something that many businesses often take for granted yet holds the potential to become one of the most dangerous risks to the financial health and stability of the business enterprise.

Sum2 sells nails. The Profit|Optimizer helps business nail down risks that can deconstruct your business. It is a great set of tools to build profits and construct a healthy sustainable business.

Next time you read Mother Goose “for the want of a nail” to a child remind them to pay particular attention to its sage advise. It may be the first lesson in effective risk management that they will receive.

You Tube Music Video: Peter Paul and Mary, If I Had A Hammer

Risk: supply chain, product liability, reputation risk, ecological

February 7, 2009 Posted by | disaster planning, manufacturing, product liability, reputation, supply chain | , , , , | 1 Comment

Kashi’s Kismet

salmonella

salmonella

Last night as I was researching the Peanut Corporation of America’s (PCA) peanut paste recall, my wife received an urgent telephone call from our local supermarket. The caller informed us that the Kashi products we purchased were subject to recall. I was a bit astonished by the call for several reasons. The first being notified of the unhappy news that a premium brand product that I so enjoy has the potential to kill me or make me very ill due to Salmonella bacteria. It goes without saying that it was a most bracing experience. I was also a bit bemused about the ability of my local supermarket to track me down to inform me that my favorite breakfast cereal might endanger me. At the very least letting me know that this is no breakfast for champions.

Though this is a positive example of how consumer product data mining and customer tracking business intelligence is employed; the realization that your breakfast eating habits are tucked away in some giant relational database remains a bit unnerving. But that is a different subject for another day.

After checking with the Kashi website the cereal products I purchased were not listed on the recall list. Kashi website lists granola bars and cookies as its only products that are subject to recall. As a committed consumer of the brand I remember when I purchased the cereal a free granola bar was included in the package for product promotional purposes. When I returned home I eagerly consumed the free granola bars. I am happy to report that I have not fallen ill. I’ll have to go back to the supermarket and ask if the non contaminated cereal I still have in my cupboard remains subject to the recall. An interesting product bundling dilemma.

The mechanics and execution of the product recall seems to be effective. The sophisticated use of data mining technologies and the ability of the manufacturer to contact a retail consumer through a digital trail that includes customer loyalty cards, credit card, and product bar codes is pretty impressive.

What is of concern about Kashi and other processed food manufacturers that are dependent on an expanded and complex supply chain is their failure to uncover the risk associated with the supplier. In this case PCA. It is alleged that PCA had a leaky roof that played a role in contaminating the peanut paste. A simple walk through of the facility may have uncovered this risk factor. Certainly if a company fails to perform the most basic facilities maintenance functions (like a leaky roof) odds are that the company has other issues and businesses functions that it is not addressing. This is the cockroach theory. Where you see one there are usually many others. A simple walk through may have revealed that all was not kosher at PCA.

Supply chain risk is becoming more prominent as manufacturers and service providers aggregate components and ingredients from numerous providers to deliver a finished product or service to end user consumers. The implementation of a sound practice program that addresses risk associated with supply chains is a key ingredient for a sustainable business enterprise.

The Profit|Optimizer devotes a section to supply chain risk. All process manufacturers must require suppliers to conduct a thorough risk assessment of processes and functions as outlined in the Profit|Optimizer. The Profit|Optimizer also includes a section on facilities risk. The risk assessment tools offered by the Profit|Optimizer would have uncovered the dangerous risk factors at PCA and may have prevented the fatal and costly release of contaminated products.

The kismet of commercial enterprises like Kashi will continue to be bright so long as the mantra of sound risk management is practiced with more vigilance. In doing so the health and well being of its loyal customers will flower as will the value of its product brands and the sustainability of the business.

You Tube Video: Vince Guaraldi, The Peanuts Theme

Risk: reputation, brand, product liability

February 4, 2009 Posted by | manufacturing, product liability, reputation, risk management, supply chain | , , , , , , , | Leave a comment

Peanut Corporation of America

A salmonella breakout that has been traced to peanut products marketed by the Peanut Corporation of America (PCA) is an unfortunate and severe example of a company with poor risk management, weak corporate governance controls and questionable ethical business practices. In most instances poor risk management and corporate governance violations primarily victimizes the company that fails to institute them. In the case of the PCA, unsound business practices has unleashed a deadly viral bacteria into a vast consumer market. Since its outbreak in October the salmonella infection is believed to have claimed the lives of 8 people and has sickened over 500. PCA violations will also cast a long shadow on the vibrant US peanut growers and processing industry.

A brief examination of some of the public disclosures that have come to light concerning the PCA speaks of a telling breakdown in sound risk management practices. These disclosures also hints at potential instances of fraud to cover up lax controls and compliance violations cited by FDA and State of Georgia food safety examiners.

The PCA had been cited for violations and lax operational controls during past inspections by regulatory agencies. Inspectors found evidence of roach infestation and mold in the production and storage facilities. Inspections also revealed that product quality had been compromised due to a degraded manufacturing process and improper maintenance of the operating facility. After bringing this to the attention of company management PCA executives sought out food testing companies that would provide results to indicate that product quality met federal safety standards and were safe to ship.

Utilizing industry standard risk analysis tools like the Profit|Optimizer would have revealed several breaches in sound risk management practices at PCA. Lax operational controls, poor facilities and the evasion of corporate governance practices will likely put PCA out of business due to the damage its actions have done to company product brands and reputation.

Problems and risks associated with process manufacturers like PCA add layers of complexity to determine product risk due to its role as a supplier in an intricate and expanded supply chain for processed consumer food products. The melamine contamination of Chinese milk products and the mortgage backed securities market crisis provide examples of how product liability and consumer risk is leveraged due supply chain complexity. The pervasiveness of products that use the peanut paste manufactured by PCA is very similar in many respects. Cookies, ice cream, crackers and other products are subject to recall. Some of the companies affected by PCA’s contaminated products include premium consumer product and brand marketing companies like Kellogg, General Mills, Jenny Craig, Nuti-System and Trader Joes.

Severe product liability events like this unfortunately also cast aspersions on an entire industry. Associations like the American Peanut Council are most concerned that the poor manufacturing practices and product quality standards exhibited by PCA will reflect on how consumers view the industry as a whole. It is a valid concern for the industry association and it must demonstrate to the regulators and consumers that its membership is committed to sound manufacturing practices, product quality and corporate governance excellence. This is not a PR problem. Nor is it a problem born from an industries anathema to regulatory control or a problem unleashed by some renegade industry member. Industries and their representative associations must also help address sound risk management and corporate governance excellence as a cultural issue that is endemic to its membership. Then industry excellence becomes synonymous with product quality and consumer satisfaction.

In all the FDA uncovered 10 violations and has published its report and carries a full listing of recalled products and other resources on the FDA website.

You Tube Video: Dizzy Gillespie’s Big Band, Salt Peanuts

Risk: product, operations, regulatory, reputation

January 29, 2009 Posted by | associations, manufacturing, operations, Peanut Corporation of America, product liability, regulatory, reputation, risk management, supply chain | , , , , , , , , , , | Leave a comment

The Yin and Yang of Inflation

Yin YangInflation like all risk is a double edge sword. Its negative nature will upset the apple cart and pose uncomfortable challenges for business managers that have grown accustomed to the status quo. It will force managers to reconsider their well conceived business plans and perhaps more closely scrutinize this quarters P&L or the company balance sheet. It will present serious challenges for businesses supply chain and client relationships. It may raise the eyebrows of your shareholders and credit providers perhaps provoking some pointed questions concerning your management skills and the validity of your business model.

That said inflation does have an upside. Like all risk factors it has the potential to create opportunities for your business. Inflation will drastically alter market conditions. It will reveal inefficiencies that nimble businesses can actively engage and manage to turn those market conditions to their advantage. The key operative words are management, intentionality and active engagement.

Inflation is a silent killer. It stalks all businesses threatening to gobble up product margins, revenue opportunities and bottom line profits. It diminishes customer buying power and may threaten the solvency of your largest customers and suppliers. It drives up the cost of capital, making credit more expensive while it forces state and local governments to raise taxes and fees.

The inflation bogey man lurks in the profit and loss statements of all businesses with small business being particularly vulnerable to its effect. Inflation dramatically shows itself on the expense side of the ledger in the increases for basic materials, energy, delivery services, T&E, administrative expenses and employee benefits. Inflation also affects the income side of the profit loss statement. It erodes the buying power of your customers and threatens collection of receivables by extending days outstanding, increased write offs or the sale of uncollected debt for pennies on the dollar.

Small business profitability is particularly sensitive to the effects of inflation because of economies of scale, concentration of risk factors and lack of pricing power.

Many small businesses lack pricing power. Pricing power suggests that if price of a product rises to a certain level demand for that product will not diminish. For a small business to have pricing power it must offer a non-commoditized product to dependent buyers. Its product or service cannot be easily replicated or widely available from other sources.

While pricing power escapes most small businesses numerous factors inhibit their ability to become low cost producers. They deliver product or service differentiation to their customers by other means then low price. Inflation erodes consumer purchasing power driving buyers to seek low cost producers. In this environment small businesses may suffer when buyers trade down to low cost providers. Key customers may compel small businesses to lower prices to be more in line with lower cost producers. This is a major threat to small businesses.

Small businesses tend to have greater risk concentration in their business model. Heightened risk concentrations are most pronounced in small businesses due to a limited product line, geographical risk, market cyclicality and in client and supply chain relationships. Consider a small manufacturer of finished steel products for the home construction industry. Generally, manufactures profitability is highly correlated to the price it pays for basic commodities and has an extremely high concentration of supply chain and product risk. Small businesses may not be able to recover or adjust its product prices to cover increased commodity prices due to existing contractual agreements with customers or its lack of pricing power. The abatement of market demand due to a recession may provoke larger customers to demand price concessions by threatening to move their business to lower cost producers. The pressure on this small manufacturer is compounded by a spike of smaller account losses and moribund demand due to weak cyclical market conditions in its target market.

It’s almost a perfect storm of negative business conditions. Small businesses managers need to understand how inflation touches all aspects of their business and must manage its impact to maintain profitability and sustainable growth.

Managing Inflation Risk with a WIN Campaign

Small businesses can meet the challenge of inflation head on by implementing a Whip Inflation Now (WIN) program that engages the numerous risks inflation poses. In deference to our former President Gerald Ford, business managers can initiate WIN Programs and actions to temper the impact of inflation and to seize opportunities that rapidly changing market conditions create. Small businesses must be extra vigilant and proactive in managing all classes of business risks.

Some small businesses will cave into the demands of their large accounts to cut prices to prevent them from going to a lower cost provider. This is very dangerous for small businesses and can result in “death by a thousand cuts.” Managers should not wait for their largest account to approach them seeking price concessions. Now is the perfect time to go on the offensive and alter the value proposition that only your firm can uniquely deliver to key accounts. Remember your largest accounts are experiencing the negative effects of inflation as well. Go to them and propose a WIN Campaign. A company’s WIN Campaign can offer a joint marketing program using WEB 2.0 techniques. Your WIN Campaign can implement an expanded training and support program tied to a business development program or supply chain rationalization. You may suggest a partnership to develop a new product or put in place a customer loyalty program. Your job is to create a unique value proposition that adds value to your product and convey it to your customer so they cannot commoditize your product. Together you and your clients can WIN the fight against inflation and turn it into a business development initiative. Your clients will appreciate the fact that you are thinking about their business success.

Another common knee jerk reaction to fight rising business costs is to reduce expenses by cutting expenditures on areas that do not support the mission critical functions of the business. Capital is allocated to maintain funding to support sales, production and product delivery. This is coupled with a lean administrative management structure and this model is seen as a recipe for economic survival. Being good stewards of corporate capital is essential during these times. Capital leakage is always a threat to business profitability and needs to be even more diligently managed during times of economic duress. But this strategy is a subsistence survival strategy. It is based on investing the barest minimum of capital to address fluctuating market conditions. This strategy may limit small businesses ability to literally capitalize on opportunities that changing market conditions present.

Cutting expenses for marketing is usually another budget casualty when businesses look to cut costs. This will reduce your current expense line for this quarter and will certainly help bottom line profitability; but skipping this year’s trade show will not help you to locate that new customer who is looking for a supplier because his current provider is struggling with product quality issues. Cutting this expense won’t provide you with the critical insights you need to stay competitive and ahead of new market entrants that are attending trade shows. Who by the way are also aggressively courting your largest account to get just a tiny slice of your business to demonstrate their “superior value proposition.”

Employee benefits and training is another area that is often the focus of budgetary cutbacks. Many small businesses need to closely consider the gains they will realize by cutting back on benefits offered to its employees. Cutting benefits could increase employee turnover. Training and hiring new employees are an expensive proposition for small businesses. The loss of key employees can potentially devastate a small business. Expertise, intellectual capital and critical business intelligence leaves the organization when a key employee walks out the door. This is doubly true if some key employees leave the firm and walk some major client relationships out the door with them.

Small businesses can also try to employ risk transfer strategies. Insurance purchases may help in some areas but to fight inflation small businesses can use financial instruments (capital permitting) to hedge against rising prices. The purchase of TIPs, FX forward contracts, commodity or energy futures can help to offset the negative effects of key inflation business threats. As the price of oil rose this summer a modest equity position in oil or other energy company would have helped to offset the increase in energy expenses.

Thankfully adverse economic conditions will force small businesses to take an honest look at their product lines and business model. Economic adversity provides an opportunity for management to make hard decisions concerning product lines. This is an ideal time to focus and fund the development of products that offer the greatest potential for long term profitability and sustainable growth.

Inflation is a significant problem for small businesses but it is a problem that can be managed. Changing economic conditions alter the landscape for all businesses that accelerate and starkly reveal market inefficiencies. These inefficiencies create market anomalies and opportunities that astute small business owners and managers can capitalize on through an intentional practice of a risk management and opportunity discovery program.

June 20, 2008 Posted by | business, commodities, credit crisis, economics, inflation, product, recession, risk management, SME, supply chain, US dollar | , , , , , , , , , , , , , , , , | Leave a comment