Managing Contract Execution Risks
In our previous editions, we explored the core contract execution risks that Trade Execution (TE) teams must manage: Contract Performance, Counterparty Performance, and Market Risk.
In this edition, we dive deeper into the practical strategies TE teams can employ to navigate these risks, ensuring smooth operations and a resilient supply chain.
Managing contract execution risk is about thinking ahead, fostering collaboration, and being nimble in the face of challenges. Let’s take a closer look at how TE teams can rise to the occasion.
Building Strong Foundations: Managing Contract Performance Risk
At the heart of every successful contract execution lies collaboration. Working closely with commercial teams and other stakeholders is essential—TE teams need to ensure that execution plans are not just aligned with contract goals but also with other internal stakeholders (e.g., commercial, finance, treasury) to ensure all obligations can be met. Without this mutual alignment, performance gaps can lead to costly disruptions.
Equally important is maintaining clear communication across all stakeholders. In the fast-paced world of commodity trading, delays or miscommunication between buyers, sellers, and service providers can escalate minor hiccups into major setbacks. Speed of communication is also critical. Email and WhatsApp are not your friends when timely decisions and action are necessary.
To avoid being caught off-guard, TE teams should embrace real-time data tracking for monitoring shipments and inventory. With up-to-the-minute information, teams can proactively address delays, pivoting when necessary to keep things on track. Trade digitalisation is an enabler of performance risk management.
But what happens when unexpected challenges arise? The key lies in flexibility. By planning for contingencies, TE teams can mitigate risks before they have a chance to impact performance.
Finally, continuous improvement is crucial. Every contract execution is an opportunity to learn and refine processes, ensuring smoother execution next time.
Safeguarding Relationships: Managing Counterparty Risk
Contracts are only as good as the parties involved. To mitigate counterparty risks, TE teams must start with ensuring that counterparties meet all pre-shipment obligations to secure performance. Using tools such as letters of credit, performance bonds, pre-payment, or deposits ensures both sides are motivated to fulfill their obligations.
But managing relationships doesn’t end with financial instruments. Flexible logistics strategies, such as the ability to hold cargo in transshipment until payment is received, can serve as a buffer against potential defaults or disputes.
Trade credit insurance is another strategy commonly employed to mitigate the risk of a counterparty defaulting on their payment obligation.
It’s also vital for trade execution teams to collaborate regularly with credit, compliance, and legal teams. A proactive approach—like routine financial reviews and credit limit evaluations—can help identify any red flags before they turn into bigger issues.
Moreover, keeping a close watch on counterparty behavior is essential. Extended payment timelines may indicate financial or working capital-related stresses. Late delivery scheduling and even external factors potentially impacting a counterparty’s ability to perform will offer early warning signs of potential trouble and provide opportunities for mitigating actions to be formulated.
Should issues arise, it’s wise to have a contingency plan in place. Having a broad supplier and customer base will ensure that a setback doesn’t derail the entire operation.
Navigating Market Volatility: Managing Market Risk
In volatile markets, TE teams must stay on their toes. Close alignment with commercial teams is essential to keep a pulse on market trends and high-risk contracts, allowing for quick responses to shifting conditions.
Supplier performance or freight issues often result in changes to shipment schedules, bringing exposure to market price risks (e.g., potentially shipping outside of the contract period). TE teams should adapt shipment plans to either expedite or delay deliveries to mitigate these risks.
Maintaining strong partnerships with logistics providers is another cornerstone. Flexible offtake and storage agreements ensure TE teams can quickly adjust routes or schedules as market conditions change. This, paired with monitoring afloat inventory, allows teams to minimize risk by managing priced, unpriced, and unpaid stock in transit.
Finally, consider the power of destination warehousing as a hedge against market risk where suitable. By implementing inventory pricing strategies at destination warehouses, TE teams can better control price risk and maximize potential margins.
A Proactive, Collaborative Approach
Effectively managing contract execution risks comes down to three core elements: awareness of the current trading environment, agility to adapt to the trading environment, and collaboration across stakeholders.
By maintaining these pillars, TE teams can anticipate and overcome disruptions, even in volatile conditions. The result? More resilient trade operations that not only minimize performance risks but also strengthen relationships throughout the supply chain.
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