Risk Management

China Crisis Caused CFO to Dust Off Risk Management Plans

Saucony's Michael Umana pondered alternative supply sources.
David KatzMay 3, 2001

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.

Saucony pays a yearly premium of more than $100,000 for the coverage, which carries a waiting period of 30 days before it would kick in. While the company would be “riding out the storm” for the waiting period, on the 31st day it would become retroactively covered for the first 30 days, Umana explains.

Saucony cut its insurance costs by assuming its own risk during the waiting period, which functions like an insurance deductible, Umana says.

In assessing his company’s risks, the 38-year-old CFO and senior vice president is aided by J.H. Albert, a risk management consulting firm based in Needham, Mass. For a fixed fee, the firm looks for gaps in Saucony’s property-casualty insurance, helps it get bids from insurers, and assesses pricing.

But Umana also bases his risk assessments on his own experiences in Asia. During a 10-day trip in December 2000, he traveled with Saucony’s chief executive officer and a board member to its suppliers’ five main factory operations in Guangzhou and Shenzhen, cities in China’s Guangdong province.

On the trip, the executives conveyed their expectations of quality performance to the suppliers, citing the metrics of the supplier subset of Saucony’s balanced scorecard.

Umana recalls the time as one “of relative calm,” with talk consisting largely of the trade advantages of China’s entry into the World Trade Organization.

Now that the crisis involving the recent standoff has abated, Umana thinks there’s “not a need to take additional steps” to manage the company’s “worst-case risk,” a total disruption of its supply chain in China.

But conflicts that fall short of full-blown international crises also pose risks for the company, he notes. At the same time, he adds, a large-scale crisis may have little effect on a company with operations outside the center of the conflict.

“There could be political uprisings in a province that could involve just one supplier or two,” he says.

Conversely, in his previous position as CFO of the optoelectronics unit of PerkinElmer, a Wellesley, Mass. high-technology manufacturer, Umana found that the company’s Indonesian facilities were unaffected by the country’s widely publicized unrest in 1997.

That’s because PerkinElmer’s Indonesian facilities were in Batam, rather than in strife-torn Djakarta, he notes.

Umana says his interest in risk management is part of his overall focus on operational matters—a departure from traditional CFO concerns like mergers and acquisitions and treasury functions.

“I never wanted to be the traditional finance guy that came out of the audit department,” he adds.

Instead, Umana says, he tends to focus on “delivery systems, productivity measures, the unique users on our Web site.”

Out of this set of concerns, he’s developed “a more preventative approach” than financial officers often have. You “try to get [a risk] off the plate before it hits you in the head,” he adds.

That’s why he’s continuing to keep his eye on developments in China.

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