Tag: risk management framework

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Risk Management Strategies to Address Price Volatility in the US Oil and Gas Industry

Risk Management Strategies in the US Oil and Gas Industry (1)

The oil and gas industry is arguably the industry with the highest risk factor given its complex nature. Companies have to deal with the fluctuating oil prices and its recent plunge due to the US government’s trade war has been a major blow for companies. However, risks in the oil and gas sector are not just confined to price volatility but cover political risks and security risks as well. Starting from the geological survey down to the lifting and production level, this capital intensive industry is faced with uncertainties at different levels. Given the aforementioned reasons, coupled with several other complexities, companies in the US oil and gas industry must implement risk management strategies to ensure financial sustainability and protect investors within the sector. The article identifies key strategies that can be adopted to mitigate the risk of price volatility and improve the risk management process.

Despite numerous risks in the oil and gas industry, investors can still make substantial profits by developing effective risk management strategies. Request a free proposal to gain key insights.  

Key Risk Management Strategies for Mitigating the Risk of Price Volatility

Risk management strategies #1: Create forward contracts

A forward contract is a customized contract that specifies prices for both parties to buy or sell an asset on a future date. It can be effectively used for hedging or speculation. In relation to the US oil and gas industry, a forward contract is a basically a private agreement signed between a buyer and a seller, obligating the buyer and the seller to purchase and sell oil at a set price which is equal to the forward price set at the start of the contract. In this, each party bears the risk of default on future commitments. 

Wondering how risk management practices such as creating forward contracts can mitigate the risk of price volatility?

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Risk management strategies #2: Develop future contracts

A forward contract that incorporates the rules of exchange is termed as a future contract. It is traded in exchanges, where a clearing house represents the buyer and seller. The key purpose of the primary house is to mitigate the risk of default and ensure the quality and quantity of the products delivered. The New York Mercantile Exchange (NYMEX) and the Intercontinental Exchange (ICE) Futures are a few of the major future exchanges. Future contracts are given much priority in the US oil and gas industry as clearing house takes the risk away from the parties, thereby improving the risk management process.

Incapability to develop future contracts can increase the exposure to volatile oil and gas prices. Stay a step ahead by requesting free platform access from our procurement experts. 

Risk management strategies #3: Introduce the concept of swap

The concept of swap can be easily applied in the oil and gas industry as a hedging instrument for risk mitigation. It is the exchange of financial assets between concerned parties at a predetermined rate, as per the terms laid out in the contract. It is usually arranged through financial institutions or through banks. Similar to forward and future contracts, oil swaps are one of the key risk management strategies companies adopt to mitigate the risk of price volatility. It transfers the risk of price volatility from oil producer to the lender. Swaps guarantee a firm price for a calculated volume of crude oil for oil producers. In case of a plunge in crude oil price below the fixed price, the financial intermediary is obligated to pay the fixed price that was agreed upon in the contract.

To gain detailed insights into the risk management strategies and the ways to develop a risk management framework, request for more information from our analysts.

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Top 4 Advantages of Vendor Risk Management Solutions: A Comprehensive Guide to Mitigate Business Risks

Rapid globalization has created the need to outsource business processes to an increasing number of partners and vendors. This has fueled the growth of the third-party ecosystem, which, in turn, has increased vendor-related risks. It has also made vendor risk management imperative for companies across the globe.

For most companies, meeting regulatory requirements is the prime reason why companies need vendor risk management. Understanding the range of risks and managing them is crucial both for vendors and the company’s customers. For instance, if vendors associate with customers directly, then vendor risk management becomes a formal way to evaluate, track, and measure third-party risks. Organizations having a huge dependency on vendors usually lack sufficient visibility into their vendor networks and expose themselves to high risks. Managing such risks, therefore, becomes a pre-requisite for businesses for sustainable growth.

At SpendEdge, we understand the impact that implementing a vendor risk management framework can have on an organization. Therefore, in this blog, our team of experts has highlighted some key benefits that companies should look to achieve while availing vendor risk management services.

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Advantages of vendor risk management solutions

Minimizes risks

With an effective vendor risk management program in place, companies can perform with due diligence and rate risks associated with vendors. They can also track and measure problems and take actions to rectify them before they harm the bottom line of the organization. This abstains companies from losing money or having a disruption of supply.

Reduces costs

A temporary vendor risk management process is usually costly and ineffective, especially if you are considering costs pertaining to data loss, remediation work, and compliance fines. Centralizing and standardizing vendor risk management offers long term benefits for companies. It reduces the cost of evaluating vendors and improves operational efficiency. 

Consolidates vendors

Relying on vendors comes with its own set of risks. These risks can be strategic, operational, or reputational, depending upon the business situation. A consolidated vendor risk management process can help companies to overcome such risks by improving contract terms, reducing costs from audits, and enhancing the productivity of vendors.

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Maintains compliance

An effective vendor risk management ensures that all the industry frameworks and data privacy regulations are met by vendors. Moreover, it provides adequate controls to companies to protect data being processed outside their perimeter. This protects companies from fines and penalties.


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How can Better Risk Management Help Counter Possible Threats in the Supply Chain Process?

Today, businesses operate in an increasingly complex environment with high risks of supply chain disruptions. These disruptions can disturb the normal flow of goods and materials in a supply chain and can have major negative consequences for business operations. Although there can be varied reasons for these supply disruptions such as strikes and labor disputes, inventory problems, and incorrect forecasts, they can hamper the productivity of the company. The more frequently these disruptions occur, the more negative the impact on the financial performance of the company. This necessitates companies to mitigate supply chain risks and have an effective risk management process in place. But before we get into the risk management process, let’s understand more about risk management:

What is risk management? 

Risk management is a process that involves the identification of opportunities and threats that might occur in the business. It is a critical and continuous process that requires companies to conduct risk analysis at regular intervals. Risk management helps businesses to follow risk management steps that can effectively counter the possible threats occurring in business processes.

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Decoding the Vendor Risk Management Process – An Ultimate Guide for Procurement Companies

Vendors play an extremely important role in determining the success of your business. No matter whether you consider it important to manage relationships with your suppliers or not, you cannot deny their significance when it comes to boosting the profitability of your organization. Many progressive organizations have realized this fact and have started developing strategies for better life cycle management. At present, however, the concept of vendor risk management has shifted from a department-level process to an enterprise-wide one. Many organizations are even centralizing their vendor risk management process and effectively managing the risks posed by vendors and contractors. This makes it even more critical for other companies to leverage vendor risk management solutions to effectively manage risks.

What is vendor risk management?

Vendor risk management is a process that allows businesses to identify and mitigate potential business disruptions and legal liabilities. It also helps monitor and manage risk exposure from third-party suppliers (TPSs), who provide IT products and services or have access to sensitive enterprise information. Since strategic, financial, operational, and compliance or legal risks may be amplified with the introduction of third parties into to the business operations, companies need to have a proper risk management framework in place to protect customers’ data. At times, vendor risk management is also known as third party risk management.

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4 Ts of a Risk Management Strategy

A risk management strategy is designed to help businesses develop a structured and coherent approach to identify, assess, and manage risks. It can be developed and implemented by projects and organizations irrespective of their scale of operations. Considering that risk is a prevalent element in a supply chain, it is imperative for modern organizations to chart out appropriate strategies to resist or mitigate such occurrences. to Prudent supply chain professionals must be equipped with the right risk management strategy in order to avoid supply chain complexities. The skill required to build an ideal risk management strategy is not developed overnight: it is gradually learned through exposure to different circumstances and issues. In this blog, SpendEdge’s industry experts have curated ‘4Ts’ of choosing an effective risk management strategy for business:

Treat the risk

Several complacencies and negative issue related to the supply chain can leave a company more exposed to threats. Though an effective risk management strategy can reduce such risks to an acceptable level by building control mechanisms into relationships or operational activities. However, it is critical that the risk management strategy adopted is proportionate to the risk and are cost effective. Having a service level agreement is a great mechanism to ensure that the supplier’s performance is kept in check. Furthermore, this can also help identify areas that require corrective measures.request proposal

Transfer the risk

All the risk that a company may encounter cannot always be mitigated completely. But is possible to transfer some risk to another body or organization through insurance, contractual arrangements, outsourcing or partnerships. The catch here is that some risks such as the risk to reputation cannot be transferred.

Tolerate the risk

As mentioned earlier, risks cannot be fully mitigated. Eventually, all risks have to be accepted as they form part of, or are inherent in, the activity under scrutiny. In the case of such instances, it is vital for organizations to tread carefully. There are some risks which for which the management has no control over and some for which any management actions would be prohibitive in terms of resources. While formulating a risk management strategy, these risks must be identified, clearly understood and acknowledged, and a contingency plan established for dealing with the effects that will arise if the risk is realized.

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Terminate the risk

In some rare cases, it is possible that a particular risk can neither be controlled nor be transferred to another entity. In this case, the only way out is to eliminate the risk by putting an end to all or part of a particular activity. The management must be highly cautious while formulating their risk management strategy here. Though an identified risk may be too much to absorb, companies must not stifle innovation.


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Developing a Sound Risk Management Process in Five Simple Steps

What is risk management? 

Risk management framework involves steps that help organizations identify potential risks, analyze them, and take corrective actions to eliminate or reduce the magnitude of the risk. For most of the digitized companies, IT security threats, data-related risks, and the risk management strategies to alleviate them have become the top priority.

Risk management process consists of steps that are implemented to minimize the adverse effects of accidental business losses on an organization. There are five key steps involved in an ideal risk management process. Read on to find out the steps involved in an ideal risk management framework.

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