Module 9B Supply Chain Risk Reading From Superstorms to Factory Fires Managing Unpredictable Supply Chain Disruptions Risk Reward trade off real trade off between efficiency and potential disruption I What is supply chain A system of organizations people activities information and resources involved in moving a product or service from supplier to customer Think about how an organization goes from raw materials to finished products on the market a chain of events II What is supply chain risk Anything that can interrupt the ultimate product delivery anywhere along Risk management relies on looking at historical data to estimate frequency the supply chain and severity of future losses o Works well for common supply chain problems Poor supplier performance poor quality late Forecast errors not ordering enough too much Transportation breakdowns o Doesn t work well for low probability high impact events Ex Hurricane Katrina Superstorm Sandy SARS outbreak III What do Author s from reading propose Ignore the cause of the disruption to the supplier o I don t care why they can t deliver just that they can t how long it will be before they can deliver Develop a model that focuses on time to recovery TTR of the supplier estimated and o The time it would take for a particular node to be restored to full functionality after a disruption Our exposure to that supplier risk exposure index estimated How does the TTR model work Take out one supplier at a time Using their estimated TTR make the adjustments we would make to the rest of our supply chain to keep getting our product to market for that duration Determine how much it would cost lost profitability Plot the results to see risk exposure to each supplier Results Methodical approach good Doesn t forget about small low cost commodity suppliers which can have a large impact Four Benefits to the authors suggested approach 1 Identifies hidden exposures exposure to each supplier 2 Avoids the need for predictions about rare events 3 Reveals supply chain dependencies and bottlenecks 4 Promotes discussion and learning within the organization Allows for more focused risk management Many key suppliers are properly managed Many small suppliers often overlooked prior to this type of analysis Module 10A Are the Risks of Derivative Manageable I What is a Derivative Definition A contract between two or more parties whose value is based on an agreed upon underlying financial asset index or security o Underlying instruments include bonds currencies interest rates stocks etc Risk Ex You agree to buy a barrel of oil for 500 in 2017 o However in 2017 the barrel is worth 600 you can sell it for a profit of 100 o OR in 2017 it is worth 400 you lose money 100 II How are they used Can be used as a hedge o Think of airlines buy 10 million barrels of fuel for a year o Enter a futures contract purchase the fuel at a specified price at a specified time Price Risk Airline has hedged its exposure to fuel price risk o However ticket prices balance it out by making them higher or lower depending on loss gain on fuel each month Can be used to speculate Ex think stock market is going to go down How can I make money on that o Enter a derivative transaction Sell the index at today s prices o Problem o Solution I don t actually own shares of the index to sell when index goes down enter a different derivative transaction to buy at the lower price o SELL HIGH BUY LOW MAKE MONEY Without ever actually owning any shares of the index However I could have been wrong with my speculation and the index ends up going up and I have to buy high means I ended up selling low and I lose money III What s the Risk unregulated OVERALL RISK FOR USING A DERIVATIVE Trades are o Derivatives traded OTC over the counter o There is little oversight to see how risky some of the positions that are being taken by individuals or organizations Warren Buffet Derivatives are financial weapons of mass destruction IV Why use derivatives They have a legitimate function They are a risk management tool they can be used to hedge Amplify leverage returns Both good and bad o All about risk reward o Help make money move faster o Help make money work harder V The problem with derivatives What we DON T know No one knows how big the derivatives market is because it is unregulated Market estimated in 2007 to be 1 44 quadrillions more than one thousand trillion o To put into comparison US GDP in 2013 16 8 Trillion US Real Estate 25 Trillion Global Real Estate 180 Trillion Global Stock Bond 2012 155 Trillion Global Stock Bond 2010 212 Trillion Remember the derivatives market is based off of all of these underlying assets VI How should they be regulated If you want to speculate shouldn t you be allowed o Speculators often help to make markets work Very complex can they be regulated effectively If internal supervisors could not see the risk how could an external regulator o Think about AIG Berkshire Hathaway Barings Bank Lehman Brothers Derivatives are a global product who should regulate Take away Derivatives help us manage risk They help us amplify put our money to work Problem is they can be used to generate more risk than they actually manage Module 10B Alleviating Human Misery The Role of Economic Reasoning Module Topics World Poverty economics Causes of poverty requites of economic growth Can governments help I World Poverty Economics Insatiable Wants Our wants desires spur economic activity Needs Food water shelter clothing Wants entertainment communication variety brownies appears our wants are unlimited Problem We don t have unlimited things to get us our unlimited wants Limited Means Resources are scarce o What s available to produce or fulfill our needs o Can t be increased at large quantities at any given time Technology Labor capital two main resources needed o Capital Nonhuman ingredients utilized in the production process The Capacity of the Economy to Produce GDP Gross Domestic Product The capacity of the economy to produce goods services Broad Measure o Primary measure of production o Total value of production using market prices o Doesn t take into account ownership where NOT who Ex Vehicle built in US counts towards US GDP Even though Japanese company owns the production process receives the profit o GDP as the economic pie Increase the size of the pie and everyone s pieces of the pie gets bigger may not be true o Doesn t tell us what is produced Doesn t tell us if items being produced are valuable for the
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