Technologies that help businesses navigate the operational and strategic uncertainties that can cost them money, are known as risk management software.
Operational risks
For traders of secondary raw materials and soft commodities, or indeed any business that relies on global supply chains, operational risks are a daily challenge. Logistical mishaps and documentation errors can cause costly delays. Compliance issues, contaminated material and underweight loads can lead to claims and penalties. Cumulatively, operational risks erode profit margins and undermine competitiveness – which risk management software tries to prevent through automation and process optimisation, for example.
Strategic risks
Strategic risks tend to be bigger-ticket items associated with market and currency volatility; financial hazards such as access to credit; and geopolitical events such as armed conflict and trade wars. Strategic risk also encompasses missed opportunities (opportunity costs) where businesses forego higher revenue and growth because their capital and time are invested in less profitable activities. Risk management software tries to help improve traders’ strategic decisions and outcomes by providing them with better data insights and context – and timely alerts.
Modern vs. traditional risk management
Traditionally, risk management has been unstructured. Traders make judgements based on their client relationships, lessons learned and subjective interpretations of economic indicators. Assessing dangers and opportunities in this way isn’t always logical or aligned with a company’s objectives. The advent of risk management software, however, enables a more pro-active and organised approach to reading a dynamic situation, following agreed rules. Used in tandem with modern methodologies, risk management software can make dealmaking more agile, profitable and resilient in the face of shocks.
Risk methodologies
Risk management software solutions work best when staff adopt a structured approach to uncertainties, with procedures for identifying risks, assessing them, and monitoring them. These steps enable the business to plan how to avert unnecessary risks, and mitigate the impact of risks that are either worth taking because of the potential upside – or are, to some extent, unavoidable.
CTRM software
In recent years, specialised commodity trading and risk management (CTRM) technologies have evolved that leverage AI and live data to navigate the volatile and uncertain world of physical commodities. Modern CTRM software assists trading in soft commodities like grains and nuts, and secondary raw materials such as scrap paper and waste plastic. ETRM software meanwhile helps energy traders that deal in oil, coal and tyre-derived fuel, for example.
Future of risk management
Modern physical commodity trading systems are increasingly adopting a networked approach to trading risks. When international buyers and sellers of commodities adopt smart contracts and electronic bills of lading, inefficiencies caused by paper documentation can be eliminated. This brings the benefits of greater transparency to all trade participants, enhancing trust and reducing many of the operational costs and uncertainties that the global commerce community sometimes views as inevitable.
Grey swans, black swans
Many small and medium sized traders don’t have a plan for grey swan events. These are high impact events that are to some extent predictable, but happen very seldom, such as the Covid pandemic. Large corporate organisations are usually obliged to develop contingency plans for grey swan risks that address ‘known unknowns’.
Black swan events, by contrast, are ‘unknown unknowns’ that lie beyond normal expectations and are therefore much harder to prepare for, such as the 9/11 terror attack. Even in the most dramatic circumstances, though, having an agile, tech-enabled approach to risk is likely to improve a trader’s chances of weathering the storm.
