Managing Risk Using risk management to enhance profitability Purchasing critical products or parts from Asia purely based on price can lead to a catastrophic hit to profit when things go wrong, according to the experts at Townley.
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F you do not have the goods, how can you make a sale?
Managing risk should be at the core of every business. The COVID-19 crisis has not only identified serious supply chain risks. It has highlighted many other risks that Australian businesses are exposed to by relying on Asia for imported goods. We have seen some supply chains completely shut down, with many factories in Asia having remained closed since the Chinese Lunar New Year. This has not only caused major disruption to supply chains right now but will continue to cause huge delays into the foreseeable future.
Does your business understand risk versus return? Incorrectly, some Australian businesses make decisions predominantly on price. What is often not understood are all the risks and myriad of hidden costs associated with the entire process of importing, particularly when the product is a high value asset or safety critical. The risk most focused on is the exchange rate. This is easily identified as it has a direct and immediate impact. Unfortunately, when the global economy experiences a crisis, the exchange rate hit can become even more volatile and costly than in normal trading periods. What many importers often fail to fully understand are the hidden costs. Some of these costs are: The risk of non-compliance with relevant standards, safety and design rules together with the wideranging impact that poor quality has throughout their business. If a product failure was to occur, resulting in injury or even death, the Australian directors and employees are personally liable for 34 JULY 2020 Manufacturers’ Monthly
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criminal penalties. Importing poor quality products has a direct impact on productivity, profit and brand reputation. Lengthy time delays and the costs associated with reworking errors or writing off noncomplying rejects. Time lost on communication difficulties with Asian suppliers including design or specification issues and misinterpretations. Having additional local quality inspection processes to compensate is costly and time consuming.
If something goes wrong, who do you take legal action against? It is next to impossible to sue someone over international legal jurisdictions, in particular when dealing with Asia. An Asian supplier cannot be joined in criminal or civil proceedings here in Australia. You and your business are left with all the risks.
Is buying from Asia a false economy? Holding larger inventory levels to compensate for delays, failed deliveries or quality concerns is one way to reduce some of the risks. However, this causes a negative impact on cashflow in these uncertain times where cash reserves are critical to sustaining businesses. The interest charged on your additional finance facilities is another hidden cost of larger working capital.
Can your business control the international geopolitical landscape? Of course not. Unfortunately, Asia, of recent times, has become a real hot bed of tensions. There are majors concerns in respect to the possible shutdown of major shipping lanes and the rising conflict over China’s claims to the South China Sea. The South China Sea has large reserves of untapped oil and natural gas. The situation
has antagonised many competing claimants including Brunei, Indonesia, Malaysia, the Philippines, Taiwan and Vietnam. Any flare up could completely close these critical shipping routes. Also, the ongoing disputes with Taiwan and Hong Kong, together with North and South Korea, are of significant concern. There is also the constant threat of trade wars and military action by the US. Closer to home, Australian wharves have a history of major disruption due to industrial relations issues. Any change to Industrial Relations Law could again trigger long pickets which would undoubtedly slow or even halt the movements at all major Australian ports.
Using risk management to enhance your profitability Understanding that without the proper analysis of price versus risk, there are many hidden costs associated with importing. These manmonthly.com.au
