Updated: Jun 16, 2020
Ignoring this key management discipline could ruin your company.
We’re talking today about risk management.
Unfortunately, in my experience, this is something that many firms, regardless of size, do very poorly. Paying lip-service to risk management opens your company up to needless liability. What's more, if you need to pursue a claim you might have limited your remedies without knowing it.
The proverbial handshake deal? This is an anachronism. And if you’re still relying on this as your primary form of agreement, you’re doing a disservice to your staff and your company.
Over six-plus years working in oilfield distribution, I managed claims that ranged from a few hundred dollars to tens of millions and involved companies from all over the globe. I’ve seen the devastating effects of neglecting your risk management.
Have you read, thoroughly, the terms and conditions your manufacturers send you? Do you read MSA’s before signing them? I’m guessing some of you don’t. How do you play the game if you don’t know the rules?
Distribution is acutely at risk because you don’t control the manufacturing, and you don't control the end-use.
Since you don't control the product's use - neither the engineering, nor putting the product into service - you must manage your risk accordingly. It is an integral part of the sale in any manufacturing/distribution context where product must meet a minimum industry standard.
Then, there is the buy side. I've seen manufacturers try to eliminate even the most basic warranties for their products and shift the liability to the distributor.
If you purchase intermediate or finished material from abroad, strong contract provisions can mitigate the costs of AD/CVD changes, the 232, or similar market shock.
Buy or sell, your company's best protection is a strong contract.
Smart businesses set up risk management systems that address risk at each key point in the supply chain: manufacture, logistics, WIP & value-add, final delivery to customer. It is not one-size fits all. Rather, it is thoughtfully designed, consistent, and self-reinforcing.
And it goes beyond just the documents themselves. Good contracts will help inform and reinforce good commercial behavior in areas like QC, accounting & inventory, sales, and procurement. They are a road map to best practices. This will reduce costs and support healthier margins.
What happens when you fail to set up good risk management that aligns with your other business functions? What happens when you “wing” other parts of your business? I truly hope you don’t do that, but…
You inadvertently assume liability for other parties or waive remedies. You do nothing to limit your financial exposure to claims. Quality control suffers. You put your company at the mercy of terms and conditions established by other parties, and those terms are written to limit your options and put you at a disadvantage.
Do you have $1 million, $5 million, or $12 million in free cash to pay for a major product claim? Is that how you want to use that cash?
There is no magic bullet. You need a methodical process to get solid, end-to-end risk management structures in place. But once you do, business runs a lot more smoothly – even when there are claims.
You are free, of course, to ignore all of this. But it means that when there is a problem you won't have access to the full scope of remedies, you will be at a competitive disadvantage, and you will miss opportunities when you cannot meet minimum risk management requirements established by your target customers.
Worst of all, it means that you lose your only opportunity to actually set the terms of a deal.
So, act. Now. Just don’t keep sitting there thinking that a handshake means you’re protected when a problem occurs. You’re not; you’re just deceiving yourself and putting your company at risk.