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Effects on a company’s risk profile
Considering the impact of a risk on a company and how it propagates through the valued chain can help management think through the change. For example, the risk posed by carbon regulation on the aluminum industry.
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The most complex domino effect is the responses from customers.
The shift in buying patterns can create a typical cascading effect. Another is changed demand levels.
Risk analysis focuses all too often only on direct threats. The classic domino effects linked to supply chains include
- disruptions in the availability of parts or raw materials
- changes in the cost structures of suppliers
- shifts in logistics costs
Most companies only examine the most direct risks facing a company and tend to neglect secondary risks that can have an even greater impact.
Companies need to learn to evaluate aftereffects that could weaken whole value chains.
Indirect risks can also hide in distribution channels. It may include the inability to reach the end customers, new distribution costs or redefined business models.
All differences in business models can create the potential for competitive risk exposure. This does not mean that a company should imitate its competitors, but that it should consider the risk when they have different strategies.
But those who routinely examine the way risks propagate across the entire value chain are better prepared for second-order effects.
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Many companies use the insights of financial managers and external consultants to manage their risk. A one-size-fits-all solution is not yet in existence when it comes to risk management.
These companies usually use derivatives like forwards, options, swaps and futures
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It’s time to look at your business with a fresh pair of eyes. It is time to get honest about where you are, where you want to be, and what it will take to get there.
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Cost-push inflation is the decrease in the aggregate supple of goods and services stemming from an increase in the cost of production.
An increase in the costs of raw materials or labor can contribute to cost-pull inflation.
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