By: Eric Bassingthwaighte, Principal at Fuel Risk Management
Coincidently, I am writing this article on August 24, 2015, or “Black Monday” (the term the media used). If you can recall the day, “Black Monday” involved price dislocations early in the trading session which caused panic selling then buying as weakness in Asia rippled through Europe and eventually to the U.S. affecting our equity, commodity and currency markets.
What does this have to do with the beer industry? Everything or nothing at all depending on your perspective, but I would argue that these “shock” events occurring thousands of miles away in foreign countries can have a direct effect on your local business (like it or not). Furthermore, these “headline-grabbing” events are moving away from being outliers or tail-end risks and closer to becoming common occurrences in the heart of the Bell Curve.
At Fuel Risk Management, for example, I analyze the risks associated with geopolitical events all over the world and evaluate potential future price paths based on different outcomes from those events that could beneficially or adversely influence your local price at the pump.
Ideal risk management minimizes spending, manpower or other resources while minimizing the negative effects of risk. Risk management is usually comprised of the following elements:
- Identify/characterize the hazards
- Assess your company’s vulnerability of critical assets to specific hazards
- Quantify the risk (probability/degree of consequence)
- Identify ways to reduce risk
- Prioritize risk reduction measures based on strategy
The beer industry involves risks of various natures: operational, compliance, financial, safety, strategic and external risks. Here is a table that can be used to help visualize and quantify an undesirable event (since many are intangible).
As you can see, risk variables (hazards) that fall in the bottom-left of the chart or “blue” sections may not be significant enough to merit attention, while risk variables (hazards) that fall in the upper-right of the chart or “orange/red” sections are significant enough to have strategies in place for those risks.
Once you have determined that an undesirable event is significant, I would recommend using a chart like the Bow-Tie model to illustrate how you are going to address the risk.
You can proactively prevent the hazards from causing the undesirable event to occur (prevention), or you can reactively mitigate the consequences after the undesirable event occurs (recovery). Both strategies can be effective. An organization’s preference on which method to use is usually based on factors like financial cost, safety and public perception.
Whether you are trying to more effectively manage your budget by hedging fuel price risk or trying to make your warehouse a safer place to work, having a risk management strategy (and periodically reviewing that strategy) helps increase certainty in an uncertain environment.
Contact Fuel Risk Management’s Eric Bassingthwaighte at email@example.com. You also can connect with Fuel Risk Management and Eric Bassingthwaighte on LinkedIn.