Risk mitigation has become a common buzz-phrase thrown around offices; it’s up there with “synergy”, “cross-departmental
problem-solving”, and “paradigm-shifting”. Enterprise risk management: what does it really mean?
Budgeting, forecasting, and company-planning revolve around our ability to accurately predict market reactions. Will our current products continue to do well next year? Can we expect the same kind of success with our new product lines? What about our competitors?
Even the most successful companies can’t predict all market variables and thus enters the need for enterprise risk management strategies, to reduce the negative effects of unforeseen circumstances.
Enterprise risks can come in a number of forms. However let’s focus our attentions on one particular area of risk, inventory management and turnover.
The concept of supply and demand is as old as business itself, and although computer simulations, complex algorithms, and the brightest analytical minds on the planet have become incredibly accurate at predicting demand, no method is 100%.
A current example could be the recent NHL lockout. Perhaps there were signs in the summer that there could be a lockout, but none of the hockey merchandise retailers could have predicted that there would be such an extended lockout months ago when they were ordering their inventory for this year. Now those retailers are stuck with storerooms of inventory that is hard to sell.
So what’s a business to do? For manufacturers, having just-in-time (JIT) manufacturing is one way to ensure that only the needed amount of product to meet the current demand is created at any given time. Although this can be a complicated process, those companies that have successfully applied this type of manufacturing avoid unnecessary spoilage and holding costs associated with incorrectly predicting demand.
Dell is a great example of a company that revolutionized the way tech companies manufacture products. A problem inherent in the technology sector is high inventory turnover rates. Within months of a product hitting the market something newer, faster, or more advanced emerges. Dell had been able avoid its products becoming outdated by only building a computer once it’s been ordered by a consumer.
Perhaps JIT manufacturing isn’t an option for your company or perhaps your main area of enterprise risk management lies more in the uncertainty involved with launching a new product into the market. You’ve done you market research, you’ve tested in consumer groups, and you’ve completed a detailed SWOT analysis. But still, there are risks.
Do you remember Pepsi AM? Me neither. Pepsi had wanted to try to enter the morning caffeine market, selling Pepsi AM as a substitute for coffee. Well, needless to say Pepsi AM failed to win over coffee drinkers, thus showing that even one of the most successful companies in the world can misread the market.
So how else can your company plan for inventory risks that you can’t predict? Consider using Corporate Trade (also known as corporate barter) as a contingency plan. Excess inventory sitting in your warehouse incurs carrying costs and can ultimately spoil, causing you to take a loss on the books. Using Corporate Trade is one way you can avoid incurring a loss.
Corporate barter companies like Active International allow you to realize the full market-value of any excess or unwanted stock. Instead of cash, Active will give you Trade Credits for the inventory. Those Trade Credits are then used to offset the cash expense on things like media, freight and logistics, and retail merchandising. Using Corporate Trade allows you some breathing room when making inventory predictions for the next year knowing that excess inventory won’t become a source of worry. This peace of mind allows more room for product and innovation without failure of total financial loss if the new idea doesn’t take.
So if your company’s new product launch doesn’t quite excite the public as you had predicted it would, consider Corporate Trade as a risk mitigation technique to realize the full economic value of your inventory. Your CFO will thank you.
By Andrew Bulmer
SVP and Managing Director
Active International Canada