In my previous post a couple days ago, and referring to the earthquake and tsunami that devastated much of Japan's Northeast coast, I asked the question Are natural disasters good for the economy? While the answer then was a conditional Yes, it will probably be a conditional No when looking at that same question today, especially when considering yesterday's post by Jim Fulcher on how the disaster in Japan has far-reaching implications.

 

Japan's supply chains are still under pressure, writes Patrick in the Supply Chain Management Review, and he is very right. I usually watch the BBC News World Business Report every morning, and today's reprot focussed specifically on Japan. With the Tokyo Stock Exchange closing some 5% up today, at least the Japanese have regained their confidence, showing that they will be able to pull themselves out from the rubble (pun intended). However, the road to recovery is long and not easily walked.

 

Japan does play a major role in the world's supply chains and with many ports unable to operate that will hurt exports as well as imports. Japan's Crisis adds new risks to global recovery, as the Wall Street Journal points out. The WSJ article featured two interesting graphics:

 

japan-merchandise-export.jpg

The figure indicates that Japan's major market lies in Asia and China. If these exports are hampered that in turn will hamper these countries, and inparticular China, in exporting their goods to Europe and the US.

 

japan-share-world-export.jpg

This figure shows the sectors that are most likely to be hit the worst by the current crisis in Japan: The automotive sector and the electronics sector. Toyota has reportedly shut down and/or reduced production at some of their facilities, and integrated circuits are hopefully available with other manufacturers. If not, we could have a reprise of the fire that severely impacted mobile phone makers Nokia and Ericsson in 2000. Reuters.com aptly named their story on integrated circuit problems as the chips to ships supply chain, and no we're not talking about the export of French fries here...

 

CNBC reports how the current Japan supply chain risk will reverberate globally, leaving perhaps many economic aftershocks in its wake. And Boeing is likely going to be hit hard, with Japan being a major supplier of parts and components for the 787 Dreamliner. And these are just a few stories that are beginning to emerge as reality hits home.

 

Considering how global trade and thus supply chains linkages really have become, there are probably very few products and supply chains that will be totally unaffected by the recent events in Japan. While some may profit from this, others may not, making this a Zero-Sum game. However, for the overall world economy, the outcome is still uncertain. Disasters do impact supply chains, as recent research shows.

 

Good for the economy? Well, what do you think?

In the midst of the Japanese earthquake and tsunami disaster - and my heart goes out to all those in the affected areas - is there a possibility of some good news? If the situation at the Fukushima nuclear power plant remains contained, the long-term effects on the economy may actually be positive, although the initial setback could be potentially quite severe, according to some ecomomists here in Norway.

 

Obviously, the first priority are the emergency and rescue efforts. Considering the damage to parts of the infrastructure, that will be quite a challenge, since there may no roads, railroads or even ports for bringing in the  aid and resources needed. Disasters do affect supply chains, but the good thing is that Japan is a  technologically highly advanced country, and thus highly capapble of  solving any issues that may arise. That is not always the case in  remoter areas of the globe.

 

A prerequiste for economic recovery is economic resilience. Japan is used to earthquakes and presumably, has the economic resilience needed to recover from this disaster. A very interesting view on economic resilience is shown the work of Adam Rose at the Multidisciplinary Center for Earthquake Engineering Research (MCEER).

 

The notion of disasters having a positive feedback into the economy is perhaps a bit out of the order at this very moment, in light of the current destruction and human suffering, but in the long run disasters in developed economies tend to have a positive effect, if you look at the overall picture. Of course, many insurers may suffer heavy losses, and many uninsured firms may go bankrupt, and many households will go through extremely harsh times to get back on their feet, but we must also keep in mind that the recovery effort will demand an enormous amount of resources. These resources must be supplied from somewhere, from local, national or international sources, and rebuilding an entire region will not come cheap.

 

A friend of mine works in a firm that manufactures shelter tents that are sent worldwide, and their business, probably already doing well after the Christchurch earthquake, will most likely do even better now. Is profiting from disasters a bad thing? I don't think so. One man's loss is another man's gain, as we say in Norway, and in times of disaster, sadly enough, it really holds true.

 

The recovery efforts may take time but I am sure that Japan will regain its ecomic strength eventually. One good thing about rebuilding is that you can replace the old with the new and better, and discard old, obsolete and inefficient solutions. Affected firms and business should thus have the potential to come out stronger and more competitive.

 

This may be a disaster on a human scale, on an economic scale it may very well be not. In the long term.

Some time ago I was appraoched by Gower Publishing and invited to review their Short Guides to Business Risk Series, a task I happily agreed to do since most of the topics covered in the series directly or indirectly link up with supply chain risk, which is what I mainly blog about. The series covers topics such as reputation risk, political risk, fraud risk, ethical risk, procurement risk and customs risk, and with more topics on the bedding: operational risk, compliance risk, kidnap and ransom risk, corruption risk, equality risk and how to facilitate risk management. So far I have completed four out of six published out of 13 on the list of books in the series, and I must say that these are indeed fine guides to the world of business risks.

 

The latest book on my nightstand is A Short Guide to Fraud Risk, a fascinating book, showing how easy it may be for employees, customers, clients and consultants to commit fraud, and how easy it may be to prevent this. While I will not review the whole book in this post, as that is reserved for the Short Guides to Business Risk post series on my regular blog, I will cite from the chapter that deals with detecting fraud.

 

The two most efficient ways of detecting fraud are:

 

1) Training employees to recognize and respond to the signal or "red flags" of fraud.

2) Proactively seeking out the red flags as a "preemptive health check".

 

While one's own employees are the best detectives in spotting signs of fraud, they may also be the worst, as it is human nature that most honest people simply cannot believe that a colleague, manager or third party is intentionally dishonest. That is actually a good thing, because an overly suspicious work enviroment will be detrimental to performance. Nonetheless, it is still possible to discern some typical behavioral patterns that might signal that something is wrong.

 

These red flags are divided into behavioral, transactional, system and corporate red flags:

 

The behavioral red flags:

- obvious excessive wealth or gross over-spending

- increasing debts and lack of wealth

- long absences or failure to take leave

- long hours after normal business hours

- repeated override of controls and procedures

- problems with gambling, drug or alcohol abuse

- excessive mood swings and sudden agression

- resistance to audit by agressive answering and deflection of attention

- misleading or ambiguous answers to questions

 

The authors do make a point that personal behavioral patterns can occur for a number of reasons and in first instance are unlikely to signal that fraud has already happened. However, in the long run, depressions and addictions may in turn lead to people committing fraud to feed their habits. Behavioral red flags are thus more useful in preventing than detecting fraud.

 

The transactional red flags:

- unusual supplier relationships

- unusual business intermediaries, e.g. companies with no employess or offices, based in tax havens and with PO Box adresses only

- non-transparent counterparts with indications of criminal associations

- payments for goods or services that are only vaguely described

- preferential supplier treatment and/or lack of competitive tendering

- payments to offshore accounts and companies not in the usual customer base

- kickbacks paid to management using a tax haven vehicle

- slush fund payments to and from offshore accounts

- money ostensibly for bribes paid into management or employee accounts

- hiding conflicts of interest using a cascade of offshore compnaies to disguide ownership

- unusual delivery of "urgent" payment instructions, by mail or courier

- photocopied documents rather than originals

- unnecesssary and/or non-standard words or explanations to make it appear more legitimate

- appearance or style not consistent with normal business of the customer

- beneficiary spelt incorrectly or mismatching with account number

 

In a business setting, where accountants and clerks perform hundreds of transactions per day it's easy to overlook and not think too much of the above. However, a trained employee will spot any anomaly very quickly. That said, it's amzing how many fraud attempts that go unnoticed, e.g. "urgent" processing during the holiday season with only temp staff working in accounting.


The system red flags:

- controls or audit logs being deliberately turned off

- logins by personell verifiably on leave

- a higher number than average of failed login attempts

- logins at unusual times

 

This is the domain of the IT department, and while no employee likes to be double-checked, communicating widely that these checks are taking place adds a valuable layer of deterrence to the system.

 

The corporate red flags:

- over-zealous acquisition strategies with little screening and lack of due diligence

- autocratic management decisions concerning business relationships and supplier selection

- losses and declining margins on sales

- artificial barriers put up by directors refusing to answer questions

- overriding of budgetary controls

- incomplete records

- unusual manual transactions, adjustments and amendments to records

 

Corporate flags are perhaps the most difficult to interpret. While easy to spot, there may be fully legititimate reasons for the occurences above. That said, even if the corporate flags above are not a signal of fraud, I would still be troubled, if I were working there. The difficult part, after discovering some red flags, is how to respond. Whistle-blowing is something that is not appreciated or valued in all companies, and while many businesses say on paper and in their procedures that they are open to it, the reality often is quite different, as many well-known or rather the not-so-well-known whistle-blowers have experienced.

 

That is why fraud detection must start with building a corporate culture where fraud is not accepted. That is something that takes time, and it is not easily established, particularly in large, multinational corporations, especially if there are offcies or subsidiaries in contries and places where fraud is perhaps the order of the day. Nonetheless, I believe that using this book as guideline can be a small yet signifcant step in the right direction, and in my next post I will take a closer look at the second way of detecting fraud, the so-called preemptive health checks.

 

If you want to know more about the Gower Short Guides to Business Risk Series you can read my reviews, or visit the publisher's website.

One thing I have noticed since I started working in the supply chain field is that there are so many industry events, conferences and meetings discussing the latest trends and presenting best practice cases. There are simply too many to follow and keep track of. On my regular blog I used to have a section for supply chain conferences, where I had the intention of promoting the very latest, but I gave up on keeping ahead of what's happening a long time ago, and only a few select conferences make it onto my blog. That said, there are some of websites that I have worked with on occasion, and that I have found very useful in keeping track of what's happening in the supply chain world. Today I would like to present some of these.


First up is the the World Trade Group, or WTG for short. They have a website wtgevents.com, which first and formeost presents webinars on subjects like  manufacturing and supply chain, human resources, food and beverage, energy and pharma, but it also boasts a number of events and conferences in manufacturing and supply chain managed by WTG, for example:

 

The 13th Annual  European Supply Chain & Logistics Summit, Berlin, Germany, 14-16 June 2011

The 7th Annual European Manufacturing Strategies Summit 2011, Düsseldorf, Germany, 17-19 October 2011

 

Eyefortransport is another interesting event manager. Their events appear more geared towards operations and logistics than WTG, and include conferences like:

 

The 2nd Horizontal Collaboration in the Supply Chain Summit, Brussels, Belgium, 19-20 May, 2011.

The 9th European 3PL Summit, Antwerp, Belgium, 22-23 November 2011

 

Finally, a site that I came across only recently, is Supplychainmovement, an initiative of the Supply Chain Magazine in the Netherlands, and giving up-to-date information about international supply chain management  topics, featuring trends, cases, reports, books, events and personal blogs posts by the editor as well as portray articles of the who's who in supply chain and logistics, some of which I've never heard about...until now.

 

I am sure there are many more sites out there, but those are the sites that I use most in keeping track of what's happening in the supply chain and logistics world. If you know of other sites, please share below, and on a side note I would be more than happy to present and review those suggestions on my regular blog.

 

Links:

World Trade Group

Eyefortransport

Supplychainmovement

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