Operations

Process Risk
Process Risk Jonathan Poland

Process risk is the risk of financial loss or other negative consequences that may arise from the operation of a business process. Process risks can occur at various stages of a process, including during the design, implementation, and maintenance of the process.

To manage process risks, organizations can implement a variety of risk management strategies, such as conducting risk assessments, implementing controls to mitigate risks, and establishing robust monitoring and reporting systems. Process risk management is an important aspect of ensuring the smooth and successful operation of a business and minimizing the potential for negative consequences.

Here are a few common types of process risk:

  1. Compliance risk: This refers to the risk of non-compliance with laws, regulations, or other requirements that apply to the business process. Non-compliance can lead to financial penalties, damage to the company’s reputation, and legal action.
  2. Quality risk: This refers to the risk of producing goods or services that do not meet the required standards or specifications. Quality risks can lead to costly delays, rejections, and rework, and can damage the reputation of the company.
  3. Operational risk: This refers to the risk of disruptions or failures in the operation of the business process that can lead to financial loss or other negative consequences. Operational risks can be caused by a variety of factors, including equipment failure, human error, and external events.
  4. Cybersecurity risk: This refers to the risk of cyber attacks or other cybersecurity breaches that can compromise the operation of the business process and lead to financial loss or damage to the company’s reputation.
  5. Reputational risk: This refers to the risk of damage to the company’s reputation that may arise from the operation of the business process. Reputational risks can be caused by a variety of factors, including negative media coverage, customer complaints, or unethical behavior.
  6. Financial risk: This refers to the risk of financial loss due to factors such as price fluctuations, market conditions, or the failure of the business process to generate sufficient revenue.
  7. Legal risk: This refers to the risk of legal action or other negative consequences that may arise from the operation of the business process. Legal risks can be caused by a variety of factors, including non-compliance with laws or regulations, disputes with customers or suppliers, or liability for damages.

Supply Risk
Supply Risk Jonathan Poland

Supply risk refers to the likelihood that a disruption in the supply of goods or services will negatively impact a business. This can include problems with suppliers, shipments, or market conditions that disrupt production, operations, sales, or projects. Supply risk can also lead to quality issues, liability concerns, and damage to a company’s reputation. Managing supply risk is an important aspect of ensuring the smooth and successful operation of a business. The following are illustrative examples of a supply risk.

Shortages
Shortages of a component, part or material.

Price Increases
Increasing prices due to factors such as supply, demand and tariffs.

Quality
Quality failures such as a shipment of parts that do not conform to specifications.

Delivery Failure
Late deliveries and lost & damaged packages.

Supplier Relationships
A breakdown in your relationship with a supplier potentially leading to a need to replace them.

Availability
Supplies that are out of stock when you need them.

Turnaround Time
An inability to obtain supplies when you need them including failures of your ordering or receiving processes.

Discontinued Items
An essential input to your products or processes that is discontinued by the supplier.

Supplier Failure
A supplier who goes out of business or discontinues an entire business unit.

Reputation
A supplier that faces negative press such that the reputation of your products is damaged by extension. For example, a part that is found to be a safety hazard or supplier who is treating employees or the environment poorly.

Supply Shocks
A sudden drop in supply on a global or industry-wide basis due to events such as a disaster, labor dispute, trade embargo or political instability.

Shrinkage
Items that disappear or are damaged between the point of shipping and receiving.

Exchange Risk
The risk of cost increases due to foreign exchange rates.

Procurement Risk
Procurement risks such as the risk of fraud in the selection of a supplier.

Procurement Risk
Procurement Risk Jonathan Poland

Procurement risk is the risk of financial loss or other negative consequences that may arise from the process of procuring goods or services. Procurement risks can occur at various stages of the procurement process, including during the sourcing of suppliers, the negotiation of contracts, and the delivery and acceptance of goods and services.

There are several types of procurement risks, including:

  1. Quality risk: This refers to the risk of receiving goods or services that do not meet the required standards or specifications. Quality risks can lead to costly delays, rejections, and rework, and can damage the reputation of the procuring organization.
  2. Delivery risk: This refers to the risk of goods or services not being delivered on time or in the required quantity. Delivery risks can lead to costly delays and disruption to business operations.
  3. Contractual risk: This refers to the risk of disputes or breaches of contract that may arise during the procurement process. Contractual risks can lead to costly legal proceedings and damage to relationships with suppliers.
  4. Financial risk: This refers to the risk of financial loss due to factors such as price fluctuations or the inability of the supplier to deliver goods or services as agreed.

To manage procurement risks, organizations can implement a variety of risk management strategies, such as conducting thorough due diligence on potential suppliers, negotiating favorable contract terms, and implementing robust monitoring and reporting systems. Procurement risk management is an important aspect of ensuring that an organization’s procurement activities are conducted in a safe and sustainable manner.

What is Moral Hazard?
What is Moral Hazard? Jonathan Poland

Moral hazard is a term used in economics to describe a situation in which one party has less incentive to act responsibly because it is protected from the consequences of its actions. It often occurs when one party has the ability to transfer risk to another party, such as when an insurer provides coverage to an individual or a company.

In the context of insurance, moral hazard can occur when an insured party has less incentive to take precautions to prevent losses, such as by maintaining their property or practicing safe driving habits, because they know that the insurer will cover any losses that may occur. This can lead to an increase in the number of claims made on insurance policies and can ultimately result in higher premiums for all policyholders.

Moral hazard can also occur in other situations, such as when a company has a guaranteed line of credit from a lender. In this case, the company may be more willing to take on riskier ventures, knowing that it has a safety net in the form of the credit line. This can lead to higher levels of risk-taking and ultimately result in negative outcomes for both the company and its stakeholders.

To mitigate the effects of moral hazard, insurers and lenders may implement measures such as deductibles, co-payments, and collateral requirements. These measures can help to reduce the potential for moral hazard by ensuring that the insured or borrower has a financial stake in the outcome of the policy or loan.

Bottom line, moral hazard is a phenomenon that can result in suboptimal outcomes and can be mitigated through the use of risk-management strategies such as deductibles and collateral requirements. It is important for policy makers and practitioners to be aware of the potential for moral hazard and to design interventions that can address this issue and promote more responsible and sustainable outcomes.

Here are a few examples of moral hazard:

  1. Insurance: An individual who has insurance coverage for their home may be less likely to take precautions to prevent losses, such as installing a security system or maintaining their property, because they know that the insurer will cover any losses that may occur.
  2. Banking: A bank that has a government guarantee on its deposits may be more willing to take on risky investments, knowing that it has a safety net in the form of the government guarantee. This can increase the risk of financial instability and ultimately result in negative outcomes for both the bank and its customers.
  3. Environmental protection: Governments or companies that are provided with subsidies or other incentives to reduce their environmental impact may be less motivated to adopt more sustainable practices, as they are protected from the full costs of their actions.
  4. Consumer protection: Consumers who have protection from fraud or deceptive practices may be less careful about checking the validity of claims made by businesses, leading to an increase in fraudulent or deceptive practices.
  5. Rent-seeking: Rent-seeking is the act of seeking to increase one’s share of existing wealth without creating new wealth. It can occur when individuals or businesses lobby for subsidies, tariffs, or other government favors, knowing that they will be protected from competition and will be able to capture a larger share of the market. This can lead to inefficiencies and suboptimal outcomes.

Market Failure
Market Failure Jonathan Poland

Market failure is a situation in which the market does not produce optimal outcomes for society as a whole. It occurs when the market fails to allocate resources efficiently, leading to suboptimal outcomes such as overproduction or underproduction of goods and services. There are several types of market failure that can occur, including:

  1. Externalities: Externalities refer to the costs or benefits of a particular action that are not reflected in the price of a good or service. For example, the negative externalities of pollution are not reflected in the price of a product that is produced using polluting methods. This can lead to overproduction of goods that have negative externalities, as the costs of pollution are not borne by the producers of the goods.
  2. Information asymmetry: Information asymmetry occurs when one party in a transaction has more information than the other, leading to an unequal distribution of power. This can lead to market failure if the party with more information is able to take advantage of the other party, leading to suboptimal outcomes.
  3. Public goods: Public goods are goods or services that are non-excludable and non-rival, meaning that they cannot be withheld from any individual and their consumption by one individual does not reduce their availability to others. Examples of public goods include national defense and clean air. Because it is not possible to exclude individuals from consuming public goods, it is difficult to charge for their use, leading to underproduction of these goods.

There are several ways that governments and policy makers can address market failures, including regulation, taxation, and subsidies. For example, a government may regulate pollution by setting limits on the amount of pollutants that can be emitted, or it may impose a tax on goods that have negative externalities to encourage the production of more environmentally-friendly products. Subsidies can also be used to encourage the production of goods or services that have positive externalities or are underproduced due to market failures.

Overall, market failures can lead to suboptimal outcomes and can be addressed through government intervention and regulation. It is important for policy makers to carefully consider the potential causes of market failures and to design interventions that can address these failures and promote more efficient and sustainable outcomes. The following are illustrative examples of market failure.

Economic Failure

The value of a free and open market is its ability to efficiently allocate resources. Economic failure is when a market allocates capital, labor and other resources inefficiently. For example, if everyone suddenly decided that volleyballs were going to be very valuable to the future and invested large scale resources into volleyball production, this could result in an oversupply of volleyballs that far exceeds demand.

Irrational Exuberance

Irrational exuberance is over-investment caused by investor behavior such as a fear of missing out. This can cause money to flow to popular companies or assets quickly and then suddenly reverse. This is inefficient as causes companies to over-expand and then suddenly retract. For example, the dot com bubble of 1997 to 2001 caused large scale waste as many technology companies received excessive funding that didn’t produce much value.

Information Asymmetry

Markets are based on the idea that buyers and sellers have equal information. If one side knows more than the other, inefficiencies can result. For example, if a company CEO exaggerates the current capabilities of a firm or hides risks, this can cause money to flow to the firm that ends up being wasted as risks known only to insiders become expensive problems.

Anti-Competitive Practices

Anti-competitive practices can cause competition to breakdown resulting in an inefficient market. For example, if all employers make employees sign restrictive agreements that make it difficult for them to change jobs, this could damage the efficiency of a labor market.

Cronyism

Cronyism is the extension of unfair economic advantages to friends and allies. For example, a government that builds more infrastructure than a nation requires because construction companies fund the political campaigns of policy makers.

Closed Markets

Closed markets such as transactions between insiders. For example, a company insider who buys assets from a firm with no competition.

Technical Failure

Technical failures such as a digital market that is altered by an information security incident.

Market Manipulation

Markets that are unfair in some way. For example, a market that gives advanced technologies an advantage over most market participants. This can discourage participation and make markets less open.

Excess Burden

A market that becomes uncompetitive due to excessive taxation or administrative burden. This may affect small firms more than large, leading a lack of lively competition.

Externalities

An externality is a cost or benefit that isn’t reflected in market prices. For example, a factory that sells widgets for $1 that each result in $40 damage to the environment due to the manufacturing process. Reflecting the cost of environmental impact in the cost of goods can be achieved with markets such as cap and trade that places a limit on environmental damage that can be traded by firms who need to pollute to produce a good.

Ecotax
Ecotax Jonathan Poland

An ecotax is a tax levied on activities that have a negative impact on the environment. It is intended to incentivize individuals and businesses to reduce their environmental footprint and encourage more sustainable practices. The revenues generated from ecotaxes are often used to fund environmental protection and conservation efforts, as well as to support research and development of more sustainable technologies.

There are several types of ecotaxes, including taxes on the use of natural resources, such as water and timber, and taxes on the emission of greenhouse gases and other pollutants. Ecotaxes can also be applied to the production, distribution, and disposal of products, such as plastics and batteries, that have a high environmental impact.

Ecotaxes can be controversial, as they may be perceived as burdensome by businesses and individuals and may lead to higher costs for goods and services. However, proponents of ecotaxes argue that they are necessary to internalize the costs of environmental damage and encourage more sustainable practices.

There are several examples of ecotaxes in use around the world, including the carbon tax in Sweden and the plastic bag tax in Ireland. Some countries, such as France, have implemented a system of ecotaxes on a wider scale, applying taxes to a range of activities that have a negative impact on the environment.

Overall, ecotaxes are one tool that governments and policy makers can use to encourage more sustainable practices and reduce environmental degradation. While they may be controversial, they can play a role in helping to reduce the negative impact of human activities on the environment and promote long-term sustainability.

What is an Economic Bad?
What is an Economic Bad? Jonathan Poland

An economic bad refers to a negative outcome or impact that results from business activity and consumption. This is in contrast to an economic good, which refers to a positive outcome or impact. Economic bads may arise as a consequence of producing goods, and it is important for economic systems to consider and account for both economic goods and bads. The following are illustrative examples of an economic bad.

Pollution
Pollution such as air pollution. For example, a factory that produces $1 million in goods per month and $7 million in damages to quality of life due to air pollution.

Loss of Resources
Loss of resources such as poorly managed agriculture that results in soil erosion.

Unhealthy Food
A food item that causes poor health and disease.

Noise
An economic process such as transport that results in noise pollution.

Risk
Risk such as a highly speculative investment product that constitutes a risk to the stability of a financial system.

Privacy
Loss of privacy such as a company that loses confidential data about customers to a malicious entity.

Misinformation
Misinformation such as a promoter of an investment that spreads false rumors.

Destruction of Value
Incentives or systems that destroy value. For example, an executive who stands to make a great deal of money if a company is sold, even if the stock declines 90% before the sale occurs. An example of perverse incentives.

Quality of Life
Other impacts to quality of life such as loss of freedom, stress and fear. For example, a pollution emergency that restricts people’s freedom of movement as it’s dangerous to go outdoors.

Economic Security
Economic Security Jonathan Poland

Economic security refers to the ability of an individual or a household to meet their basic needs, such as food, shelter, and healthcare, without undue financial stress. It also includes the ability to withstand financial shocks, such as unexpected job loss or medical expenses, without falling into poverty.

There are several factors that contribute to economic security. One is access to stable and well-paying employment. This can be challenging for some individuals, especially those with limited education or job skills, or who live in areas with high unemployment rates.

Another factor is access to affordable housing. Rising housing costs can make it difficult for individuals and families to afford a place to live, leading to homelessness or the need to spend a significant portion of their income on housing.

Other factors that can impact economic security include access to credit and financial services, such as bank accounts and loans, and the availability of social safety net programs, such as unemployment insurance and food assistance.

Governments and organizations around the world have implemented a variety of policies and programs to promote economic security. These can include job training and education programs, minimum wage laws, and social welfare programs.

Economic security is an important aspect of overall well-being and can have a significant impact on an individual’s quality of life. It is important for individuals, governments, and organizations to work together to ensure that everyone has the opportunity to achieve economic security. The following are common types of economic security.

Water Security
The resilience of systems that provide water for human well-being and economic production. This includes access to water and management of risks such as water pollution and water-related disasters including floods.

Food Security
Access to a stable and adequate supply of nutritious food for everyone in a community. Management of risks to the food supply such as the risk of a supply chain disruption. For example, a region that grows much of its food locally is more resilient to a dispute that shuts down trade.

Air Quality
Communities with clean air and a low risk of an air quality emergency.

Energy Security
Energy security such as a local system of distributed electricity production based on renewable energy.

Shelter
Access to shelter and management of risks to shelter such as disasters. For example, a city where everyone has sufficient shelter that is engineered to be resilient to fire, earthquakes and floods.

Hygiene
Basic standards of hygiene such as management of waste. Management of risks to hygiene such as disasters.

Basic Income
Social programs that provide a livable sum of money to all or to all that are in need.

Public Services
Provisioning of essential public services such as healthcare.

Employment
Economic systems that provide a stable system of employment.

Transportation
Transportation systems and urban environments that aren’t easily disrupted.

Economic Stability
Managing the risks of an economic failure such as a recession, depression or period of high inflation or deflation.

Wealth, Debt & Liquidity
The ability of a nation, region, city, community, individual or family to meet its fixed expenses in the short and long term.

Financial Stability
The resilience of financial systems. For example, a banking system with adequate reserves and systems for managing risk.

Markets
The resilience of markets such as regulations that guarantee free competition.

Physical Security
Measures to protect people and property from physical harm such as a justice system that protects people from crime and infrastructure that protects people from natural disasters.

Information Security
The security of technology that underlies critical systems such as financial institutions, public services, infrastructure and production.

What is Food Sovereignty?
What is Food Sovereignty? Jonathan Poland

Food sovereignty is the right of peoples and countries to define their own food and agriculture systems, rather than being dictated by external forces such as corporations, international trade agreements, and globalized food systems. It is a concept that has been developed and promoted by small-scale farmers, rural communities, and food justice advocates around the world.

Food sovereignty emphasizes the importance of local and national control over food production, distribution, and consumption, and the right of communities to determine their own food and agriculture policies. It also prioritizes the protection and promotion of traditional and indigenous food systems, and the right of farmers to access and control land, water, and other resources.

Advocates of food sovereignty argue that globalized food systems, which are often controlled by large corporations and dominated by export-oriented agriculture, often result in the degradation of local food systems, the loss of biodiversity, and the exploitation of farmers and rural communities. They argue that food sovereignty is a way to promote more sustainable, equitable, and resilient food systems that are better able to meet the needs of local communities and protect the environment.

Food sovereignty has gained increasing recognition in international forums, such as the United Nations, as a key approach to addressing issues of food security and sustainability. However, it is often challenged by governments, corporations, and other powerful actors who may have a vested interest in maintaining the status quo of globalized food systems.

Here are some examples of how food sovereignty is being promoted and practiced around the world:

  1. Community-supported agriculture: Community-supported agriculture (CSA) is a model of food production and distribution that involves farmers and consumers working together to grow and distribute food locally. CSAs typically involve farmers selling shares of their harvest to consumers, who then receive a weekly box of fresh produce. This model helps to support local food systems and strengthen the connection between farmers and consumers.
  2. Local food movements: Local food movements seek to promote the production, distribution, and consumption of locally grown and produced food, in order to support local food systems and reduce reliance on globalized food systems. This can include initiatives such as farmers markets, food cooperatives, and community gardens.
  3. Agricultural cooperatives: Agricultural cooperatives are organizations owned and controlled by farmers, which allow them to pool their resources and work together to produce and sell food. Cooperatives can help farmers to gain more control over their livelihoods and improve their bargaining power in the marketplace.
  4. Land reform: Land reform refers to policies and initiatives that seek to redistribute land from large landowners to small farmers, or to provide small farmers with access to land. Land reform can help to promote food sovereignty by giving farmers greater control over their land and resources, and enabling them to grow food for local consumption.
  5. Food sovereignty legislation: Some countries have enacted legislation to promote food sovereignty and protect local food systems. For example, in 2015, the government of Venezuela passed a law to promote food sovereignty and support small-scale farmers. The law established a network of urban and rural food production and distribution networks, and provided funding and resources to support small farmers.

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