China Crisis Caused CFO to Dust Off Risk Management Plans

Saucony's Michael Umana pondered alternative supply sources.

What if most of your company’s products were manufactured in a country locked in a tense political conflict with the United States?

That question was very much on the mind of Michael Umana, the CFO of Saucony, during the crisis that followed the April 1 collision of a U.S. spy plane and a Chinese fighter jet.

A few days after the incident, Umana, who had already brought a risk- management consciousness to the company in his two years there, thought it was time to dust off the sneaker maker’s contingency plans.

At that point, Umana thought the standoff between the two countries would “move down the path to something like the Cuban missile crisis,” he told CFO.com earlier this week. Besides its broader international implications, the crisis could have threatened almost all of Saucony’s supply sources.

Why? Eighty-five percent of the Peabody, Mass.-based company’s total business volume is in footwear, and practically all Saucony shoes or shoe parts are produced by manufacturers in China. In fact, during fiscal year 2000, one of the company’s suppliers in China accounted for about 51 percent of Saucony’s total footwear purchases by dollar volume.

To be sure, Saucony’s trade-disruption insurance (TDI) policy would protect it for 90 days from perils resulting from frictions between the two countries.

But the three months amounted to a deadline for the company to move its operations out of China if an ongoing crisis made it impossible for Saucony to obtain its wares.

It was time for Umana, a self-described “operations CFO” rather than a finance whiz, to make sure plans were in place to keep operations moving if the crisis persisted.

Umana thought it was time to explore the company’s plans for taking the “initial steps” in shutting down its China operations and moving to other countries.

The CFO called the company’s 30-person office in Taiwan, which acts as a liaison with Saucony’s suppliers in China, and asked them to start looking for possible suppliers in other countries.

The company could find suppliers in Vietnam or in North or South Korea, with “an interim stop [in] Taiwan,” he says.

Umana thinks Saucony could reestablish its supply chain within the 90- day period if the company devoted itself full-time to the task. “That is our estimate of how much time it would take to transition that business” and move such things as its molds and dies from China, he adds.

The CFO can feel secure about having at least those three months because of a prior risk management decision he’d made: To buy trade- disruption insurance.

Working through William Gallagher Associates, a Boston-based insurance broker, Umana bought a TDI policy put together by The Miller Insurance Group, a broker at Lloyd’s of London.

The policy, an extended form of business- interruption insurance, would cover Saucony’s gross profit loss and extra expenses resulting from a trade disruption at specified locations for a period of up to 90 days. Umana estimates the losses covered by the policy could amount to more than $20 million.

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