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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

Credit Redi Blog

Credit Redi is a company sponsored blog of Sum2. The purpose of Credit Redi is to help small and mid-size enterprises (SMEs) protect and improve their ability to access credit and equity financing from banks , shareholders and other funding sources.

Sum2 is dedicated to the commercial application of sound practices. Our sound practices program and products address:

  • corporate governance
  • risk management
  • stakeholder communications
  • regulatory compliance

Sum2 believes that all enterprises enhance their equity value by implementing a sound practice program. Sound practices are principal value drivers for corporate and product brands. Practitioners are awarded with healthy profit margins, attraction of high end clientele, enterprise risk mitigation and premium equity valuation.

Sum2 looks forward to helping you address the pressing challenges of the current business cycle.

You Tube Video: Herb Alpert and the Tijuana Brass, Work Song

Risk: abundance

January 28, 2009 Posted by | banking, credit, risk management, SME, Sum2 | , , , , , , , , , , | Leave a comment

SRZ’s Maginot Line

maginot_line_19441Schulte Roth Zabel’s (SRZ) Annual Private Investment Funds Seminar is the kick off event of the year for the AIM industry. In years past it was an event that was full of bravado from an industry flush with great expectations and giddiness over compensation levels that rivaled a small country’s GDP. This years event had more circumspection then bluster and more reflection on how to fashion a considered response to industry challenges squarely in the vortex of the market meltdown.

The shocking transformation and radical reconfiguration of the capital markets industry is underway. In the wake of the Lehman bankruptcy, Bear Stearns merger, market crashes, credit crisis, bank insolvency, recession and lastly the coup de grace of the Madoff scandal put these intrepid wealth managers through a trying year.

Myriad challenges and crises tested many firms management acumen and forced managers to work extra hard to earn that 2 and 20.  With hedge fund closure rates expected to approximate 25%-45% this year, the industry is confronted with enormous challenges. The excess capacity in the industry, heightened regulatory oversight, liquidity constraints and elevated client risk aversion will foster market compression and a dramatic alteration in market dynamics. The well managed, well positioned, well focused and well capitalized funds will thrive on the volatility. Uncertainty is always the mother of invention and the best and brightest of the breed will no doubt find numerous opportunities amidst the massive market dislocations currently underway.

SRZ a leading legal firm servicing the industry effectively laid out an industry battle plan to address many of these acute challenges. In the Crisis Management breakout session the panel offered an interesting metaphor of a hedge fund as an intricate and complex ecosystem. The topology of a fund complex is comprised of many parts that at times may have contradictory and competing interests.

The Crisis Management session conducted a quarterly review of market events that occurred in 2008 as the capital markets deteriorated and the credit crisis deepened. The panels review was an instructive exercise on how managers need to constructively engage problems with an intentional risk management program and how it affects each stakeholder in the hedge fund ecosystem. The principle objective was determining the best course of action to either save the fund or effect an orderly liquidation of the investment partnership. In all instances the strategy needed to consider how to serve the greatest good for all fund stakeholders. SRZ offered attendees a brilliant crisis management game plan for fund managers. It was one of the better presentations on risk management that I have ever attended.

The general session was also very interesting and engaging. The central theme was that hedge funds are under extreme liquidity pressure. The drivers are distressed portfolio valuations, counter-party deleveraging, risk aversion in the markets, market liquidity and increased redemption pressures from investors. SRZ has developed a series of innovative redemption strategies it calls gates. The gates are designed to protect the level of assets under management by controlling an orderly outflow of capital so as not to endanger the overall liquidity and asset level of the fund. SRZ again shows why it is the leading player in the space by offering innovative solutions to industry needs. A great example of a market leader demonstrating leadership by offering innovative product development solutions.

The overall tenor of the conference reminded me of the construction of the Maginot Line. In years past investors were eagerly throwing money at hedge fund mangers to get a slice of the alpha pie. Today hedge fund managers need to build sophisticated battlements to keep the assets of the investment partnership under their control. In a sense the industry as moved from an offensive posture to a defensive one. SRZ is assisting its hedge fund clients to create a defensible business structure that will protect the long term sustainability of the fund and ultimately serve the greatest good of the funds partners and stakeholders.

During these times of extreme market duress tactics and strategies must be employed to protect the fund from excessive redemption runs that would ultimately serve to create a self fulfilling prophesy of liquidation.

Clients who have access to a war council of professionals like SRZ should be well suited to engage the battles they will encounter in the coming year and survive to enjoy the peace and spoils won during the next business cycle.

You Tube Video: Edith Piaf, Mon Legionnaire

Risk: market, credit, legal, reputation

January 15, 2009 Posted by | hedge funds, legal, risk management | , , , , , , , , , , , , , , , | 2 Comments

Profit|Optimizer Presentation 1108

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Profit|Optimizer Presentation 1108

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December 16, 2008 Posted by | Uncategorized | , , , , , , , , | Leave a comment

Economy Sheds 157,000 Jobs

Lost in the euphoria of Barack Obama’s electoral triumph is today’s rude reminder of the the continued deterioration of the economy.  ADP published its monthly report on employment yesterday revealing that the US economy shed another 157,000 jobs during the month of October.

According to the report, “large businesses, defined as those with 500 or more workers, saw employment decline 41,000, while medium-size companies with between 50 and 499 workers declined 91,000. Employment among small-size businesses, defined as those with fewer than 50 workers, declined 25,000. This is the first outright decline in small business employment reported by the ADP Report since November of 2002, and the largest percentage decline since the economy was emerging from recession in early 2002.”

The recession is now enveloping small businesses.  This is a most ominous sign.  It should be born in mind that the ADP report usually reports numbers that are not as severe as numbers that the Department of Labor will issue later this week.

Not surprisingly manufacturing lost 85,000 jobs during the month.  This was the 26th consecutive monthly decline for the sector.

The full ADP Employment report can be accessed here.

President elect Obama will have a tough row to hoe.  The revival of the economy will be a prolonged and difficult effort requiring patience and careful attention to undo three decades of erosion to the countries industrial infrastructure.  Sum2 advocates The Hamilton Plan as a recovery program for the economy and SME manufactures.

Music Video: Bruce Springsteen, Pay Me My Money Down

Risk: recession, industrial capacity, unemployment

November 7, 2008 Posted by | manufacturing, recession, unemployment | , , , | Leave a comment

Level Three Sinks Lower at GS

Interesting piece at CFO Magazine concerning fair value deterioration of Level Three Assets at Goldman Sachs during the month of August. Goldman Sachs reports that valuation of Level Three Assets dropped by 13%. It would be interesting to understand the impact of this collateral erosion had on GS’s largest counter-party AIG?

Was this the trigger that precursors the radical interventionist moves by the Treasury to purchase a controlling stake in AIG?

This insight will become most constructive as the Treasury begins its purchase program of toxic level three assets. Hammering Hank has hired Neel Kashkari one of his mentees from GS to head up the repurchase program. Mr. Kashkari is said to be a quantitative wiz kid and a real life rocket scientist to buy Level Three Assets from GS and other banks and create and manage a portfolio of toxic assets on behalf of the American taxpayers.

The CFO article can be viewed here.

You Tube Video: Goof Troop Level Three

Risk: collateral valuation, counter-party default,

October 8, 2008 Posted by | banking, credit crisis, EESA, FASB, TARP, Treasury | , , , , , , , , , | Leave a comment

Existential Valuation

Charles Ponzi

Many pundits blame the banking crisis on people taking out mortgages they could not afford. I place it at the feet of the investment banks that funded the sub-prime mortgage products.

Michael Lewis’s book Liars Poker details how Salomon Brothers business exploded during the late 1980’s as the mortgage market began to grow. Salomon Brothers since acquired by Citigroup was an early innovator in the creation and sales of mortgage backed securities (MBS). Without MBS the necessary funding that fueled the exponential growth of mortgage finance, construction, home finance lending and equity lines of credit could not exist.

This innovation drastically altered the nature of the banking industry. Bank’s at one time loaned out money from their own capital. But this changed with the advent of MBS type products. Structured products allowed local banks to access funding from many sources and changed banks into credit channels that marketed credit products financed by third parties. Since it wasn’t their capital at risk, risk management and due diligence suffered.

The great innovation of MBS was that it added leverage to the credit markets. As investment banks and buy-side investors grew rich on the cash flows provided by MBS the investment banks began to invent new financing products. CMOs, CLO’s, ABS securitized cash flows and other exotic derivatives like CDS came onto the scene to provided investor protection in the event of a counter-party default. These products levered up the debt positions of corporations, consumers, investors and governments. It created an economy overly dependent on an unsustainable credit marketing industry. As is the case with all Ponzi schemes, as the low man on the totem pole began to default on the usurious rates charged for sub-prime loans the entire house of cards collapsed.

As leverage in the credit markets grew to fantastigorical levels these non-market traded products became more sophisticated and esoteric. These products were structured to address investment requirements of institutional investors. Since they were non-exchange traded securities sold directly to investors the ability to value these securities was exceedingly difficult. As the market developed further the Financial Accounting Standards Board (FASB) had to create rules and asset classifications of these securities so that they could be properly valued for reporting purposes. FASB solution was to classify these assets as Level Three.

See May 17 Risk Rap Post on FAS 157

Herein lies the rub for these Level Three assets. Maybe the dismal science can wave a magic wand and make these assets double in value, disappear or perhaps quarantine these securities in accounting purgatory waiting for better times and future Treasury Secretaries to offer absolution and full redemption for the past sins of our fallen Masters of the Universe.

But just because we say it ain’t so bad don’t make it so good. The Basel II global banking guidelines for capital adequacy insist on transparency on asset quality. The world central bankers have agreed on a formal regulatory methodology to determine asset valuation, solvency conditions, collateral management practices and acceptable ratios of economic and regulatory capital requirements necessary to protect against defaults in the credit markets. What a thought! The US banking industry should stop dragging its feet on its adoption and start implementing the recommended strict disciplines it advocates to protect the solvency of our banking system.

No more voodoo economics, asset valuation slight of hand or accounting convention tricks and balance sheet gymnastics. We need fiscal disciplines, transparency and accountability based on sound economic and generally accepted accounting principles. We need to develop an economic infrastructure that is based on the creation of value and equity not an economy based on creation of collateral and deepening debt.

Music: Cab Calloway and the Nicholas Brothers Jumpin Jive

Risk: bank solvency, pariah nationhood, FASB, Basel II

October 2, 2008 Posted by | banking, credit crisis, FASB | , , , , | Leave a comment

Macroeconomic Risk Impacts SMEs

Small and mid-size enterprises (SME) are acutely susceptible to the negative impact of macroeconomic risk factors. Macroeconomic risk factors such as inflation, interest rates, market cycles, market regionalism, credit and labor availability, and fuel costs conspire to drain profitability and financial health of small and mid-size businesses.

Though issues of scale are principal culprits that enhance the negative impact of macroeconomic factors on SME’s, other factors such as risk concentration in product markets, clients, and supply chain; silo business functions and lack of specialized treasury functions to hedge risk and maximize capital allocation returns also contribute to enhanced macroeconomic risk profile of SME’s.

To help SME’s to better understand and manage the impact of macroeconomic risk factors on their business; Sum2 is providing the Profit|Optimizer Macroeconomic Test to small business owners and managers at no charge. The test is a module from the Profit|Optimizer product which provides a thorough risk assessment and opportunity discovery review of a small business enterprise.

The test can be accessed by clicking this Profit|Optimizer hyper link.

We hope to be of service. Take the test.

You Tube Video: Charley Brown

Risk: SME, Macroeconomic Risk, Inflation, CRG, Risk Management

May 31, 2008 Posted by | risk management, SME, Sum2 | , , , , , | Leave a comment

Reinventing Community Banks

Community Banks have been profoundly affected by the current crisis in the credit markets. Many will need to reposition their market focus and adopt innovative growth strategies to build its capital base and sustain profitability if they wish to remain independent.

Community banks have confronted drastic market challenges in the not to distant past. During the 90’s community banks dominance of the small and mid-size business (SMB) market began to erode. The dynamics of the banking industry changed rapidly. Large money center and regional banks leveraged technology, operational and balance sheet scale to provide access to inexpensive credit products bundled with cash management tools. They were armed with huge marketing budgets and became adept at selling a growing array of transaction services that met the growing sophistication and business needs of the lucrative SMB market. The current banking crisis forebodes yet another drastic alteration in the structure, regulatory and businesses practices of the industry. The current banking crisis will forever alter the face and scope of community banking sector.

The challenge for the community bank will to reinvent itself. Community banks must decide who its customers are and target the market with focused precision. Community banks need to recognize its strength by leveraging its natural geographic advantages and sell products into markets that transcend local limitations. Community banks need to offer products that help SMBs manage cash flow and liquidity, make informed decisions on capital allocation initiatives, decrease cost of capital and products that facilitates transactions and fosters new customer acquisition.

Community banks must also begin to farm new liquidity pools. Securing funding sources in a world of limited liquidity will be the greatest challenge for community banks. Overcoming regulatory hurdles notwithstanding, branding community banks as a consistent, trusted and efficient delivery channel of credit products is an important ingredient for its survival. The community bank must recognize how it adds value in a complex and expanding delivery chain. The failure to secure funding sources will only accelerate balance sheet erosion that results in merging with another institution or liquidation.

The community bank must assure its funding sources, equity holders and regulators that it truly knows and understands its customer’s market and growth potential. This KYC goes deeper then determining an acceptable FICO score, Federal ID verification and passing an OFAC screen. Employing risk management and opportunity discovery exercises with SMB prospects and clients are principal business drivers that provide critical disclosure information to funding sources that address risk aversion concerns.

Funding sources and other stakeholders must be secure in the knowledge that the community banker understands the peculiar risk characteristics of the SMB’s strategy, business model and governance and risk management acumen to provide investors and lenders exceptional returns on investment capital and lines of credit. The banker then becomes an effective risk manager whose vigilance and considered business judgment provides a fair return to funding sources, assures regulators that capital ratios remain strong and reward shareholders with appreciating equity valuations.

Community banks are just one of the many expanding choices an SMB has to provide banking and financing services. Community banks must create a compelling brand identity and articulate a differentiated value proposition with focused product marketing to regain its market dominance with SMBs.

You Tube Video: The Beatles, Money

Risk: Credit, Market, Banking, Small Business, Recession, Marketing,

May 30, 2008 Posted by | banking, credit crisis, SME | , , , , , , , | Leave a comment