Macroeconomic Fluctuations and Global Credit Risk Policy

[0:00] Moustapha Oud Ibn Mogdad:

Thank you very much, ladies and gentlemen, for coming to this session, even for the happy hour, you left your happy hour to come here to listen to macroeconomics, which is a must hated subject in any university courses. Trust me, I’ve been there. And I know that people don’t like micro-economy. But the reality is with micro-economy, something very interesting. It is a recession. And by saying recession, I don’t want you to get scared, as more than 70% of economists suggested that in 2021 will have a recession, no matter what they told you in the news that we are in a good shape economically and everything is good in Canada because I’m Canadian. So I’m not talking about the US, no politics. So that’s not the reality of what’s happening. What’s happening, it’s something else. What is the sign of a recession and what it means for your organization? So this is a question that I’m asking you very briefly if anyone knows the sign for your organization about the recession very quickly.

[1:11] Moustapha Oud Ibn Mogdad:

You don’t see any sign in your company about the recession. Oh that’s great. I mean, you’re doing excellent. Reality is you have an increase of two days in a cash conversion. And you have more than three days increase in the days inventory health, and you have more than two days increase of your DSO, the daily sales outstanding. When you have these three combined it means that there is a recession in your business or there is a global recession, outside of your business hitting the whole economy. Now that’s deep diving in the wide impact on order to cash cycle, the late payment, then collectible, bad news. The bankruptcy caused stricter customer credit by a supplier. So, these are the three impacts that most of the time you will see when your business or your country is hit by a recession. Is your credit policy prepared for any such fluctuation in the future? Quick question. Do you have anything in your credit policy mentioning about recession?

[2:31] Moustapha Oud Ibn Mogdad:

And again, that’s not reality. If you remember 2008 if you are from North America when the recession hit in 2008, a lot of manufacturing business went through this or I can tell you that my experience because I was in a food industry, and I can tell you the DSO in the food industry is seven days. In 2008, the DSO went to almost a month and this is even for big chain food that I can’t name in this conference. But when you have the lifecycle of a food, it’s around seven days, mostly for the dairy food. If it exceeds seven days, you have to move from the shelf. During recession time, they have to increase the life cycle time of certain food to allow more than seven days as a DSO.

[3:24] Moustapha Oud Ibn Mogdad:

A lot of people they don’t know about it, that we in the business, we knew about it. And we know what’s happening and how it’s hard because people, they have a hard time paying their mortgages, and they have a hard time buying food too. So what that means basically no payment for your company because they need to feed themselves first before they pay for luxury or for pay for anything else. Now, the whole introduction, as you can see, is about micro-economy. We now go to the real agenda, we’re going to talk about knowing the fluctuation. Learning the risk proving technique and making the perfect execution plan. And I will go through it very quickly because I would like to have it more interactive with you, then just by me reading to you exactly what I have learned in the past or from the school.

[4:17] Moustapha Oud Ibn Mogdad:

Knowing the fluctuation, how many of you know the different fluctuation in micro-economy? Don’t worry. It’s in the book already.

[4:29] Moustapha Oud Ibn Mogdad:

The most common macroeconomic fluctuations are six. First, the recession is one of the most important one and the one that everybody talks about. The second is the trade and tariff. The third, it’s the first measure, government regulation, organizational finance policy changes and natural calamity. I will give you briefly an example about how some companies dealt with these six major Common macroeconomic fluctuation. I would say start with Costco.

[5:05] Moustapha Oud Ibn Mogdad:

In 2008. Costco especially for the recession, what they have done simply they streamlined the stores. They actually added 67 SQ in their business model to be able to cope with any differences in price difference that may happen within the time of recession. They increased the time to redo this shipment by end of 24 hours and along with the reduction of the SQ Cosco revised their category mix.

[5:38] Moustapha Oud Ibn Mogdad:

JOHN DEERE working with the dealer to reduce the receivables and improve the process to reduce work in progress inventory level. All of it was done during the time of the recession. With all, we have the phone and devices from Samsung. They invest more in their research and development during their recession than anything else. They stop investing in an advertisement. They stop investing in marketing. And they put more money in research and development to come up with new devices on the market that will cope with the recession.

[6:14] Moustapha Oud Ibn Mogdad:

Big acquisition, Stanley Black and Decker, they made 41% acquisition in 2009. They went after every small business that they can acquire during the time of recession because they know that they have a hard time. It was a different strategy than anyone else. And since 2010, the combined company has produced healthy revenue growth for almost 70%.

[6:46] Moustapha Oud Ibn Mogdad:

Tariff, which is another component. One of the biggest examples that we have in a macroeconomy is cats. And I’m sure most of you are familiar with Cats. So, Cats manage a plant at United Chemi-Con in North Carolina and the village is about 1500 people without a traffic signal. The only village in the United States with no traffic signal. The facility which makes capacitors for industrial and consumer products is covered by a Foreign Trade Zone based in Greensboro. I don’t know where that’s located. But anyway, so one of the biggest problems they have is the tariff. So how they solve it, they move to a trade zone area near the port entry of the US custom board to eliminate all the tariffs that they have to deal with when going through that small village. And by that, they actually avoid the US tariff on imported aluminum from Japan completely.

[8:00] Moustapha Oud Ibn Mogdad:

This is another factor that we use in micro-economies especially for corporations to make sure that they cope with any trade tariffs that may happen. A lot of three tariffs between Canada, the US, and Mexico, a lot of companies, especially North American companies have to deal with it. The same thing is happening now with a Brexit. Remember the UK is no longer a member of Europe. No offense, yeah. Okay. But at the same time companies have to come up with a strategy, the biggest strategy because when you have one single country dealing with another, around 15 or 16 other countries, you need to have a very good understanding of the three tariffs.

[8:40] Moustapha Oud Ibn Mogdad:

The first measure, actually, it’s one thing that most economics cannot predict. Even they tell you they can know. And I’ve been looking at different cases. And I asked a lot of people who gather data for economic purposes, and there is nothing we can do about the first measure. Now, that being said, not to prevent the first measure that you can work out after the first measure. We all remember Katrina, Hurricane Katrina, okay. After Hurricane Katrina, a lot of companies start thinking about the whole process for how they will manage with that area and how they move completely from the model that they’re using to another model, which streamlines the revenue by not going to a place where is the major natural factor for a disaster? Like a flood area, like an earthquake area? So these things that you have to think about when you talk about the first measure? I am not an alarmist. I’m not saying nothing about the iceberg and you know, what we call environmental catastrophe. That’s not there is nothing there that you can do about it for the moment, we are still at the beginning to study it. And there is a lot of studies and research going now through what will be the impact and how we can reduce it. But for practicality, the first measure most of the time when we talk about it, it’s a natural disaster like the earthquake, as the Hurricanes like the flood. These are the first measures that we use as a model.

[10:28] Moustapha Oud Ibn Mogdad:

The funny part about government regulation, you have to understand what’s regulation required has changed. You need to ask your lawyer, you need to ask the legal team about what’s the change within the regulation, you know, as a people in finance or most of you hope they are finance, you cannot control the regulation and the government. So, the organization’s financial policy changes that’s based on the same thing as government regulation. Because of the government regulation let’s say in Ireland, it’s different from Northern Ireland and you are in the same Ireland, north and south of Ireland. And the regulation has changed in the north of Ireland because North allows part of the UK then definitely if you have your business in south of Ireland, you need to look at what the regulation should apply to you when you’re moving goods between the two countries the same thing between NAFTA when we didn’t have NAFTA between Canada and US and Mexico, we have to look at all different regulation before we move between the three-country until the agreement that the three voluntary agreements was signed.

[11:35] Moustapha Oud Ibn Mogdad:

Natural calamity, what we can say about natural calamity except for one thing that’s there is nothing you can prevent about it. But you have to study the way after, the lesson learned from the natural calamity. The Perfect example we have right now. It’s the coronavirus. So, as you know, I know by experiencing our office in China is closed when it is going to be open? We don’t know. So what we have done as a perfect example for that, we have asked the people that are not part of that province to go and work from the office is in Hong Kong, or in the office in Japan as a way of, you know, balancing the work balance with these people, if they can, they can still work from home and they need not go to the province. So that’s part of the policy that you have to put in place with your legal department and security department to make sure that we prevent the natural calamity.

[12:37] Moustapha Oud Ibn Mogdad:

So now, the fun part is how you will improve your credit risk policy and use the technology. It’s awkward when we talk about recession, and we don’t talk about technology because technology is everything nowadays. Understanding how artificial intelligence works and how machine learning enhances your credit policy. If I can tell you that 15 years ago, I will never be speaking about this subject and adding anything related to AI, or to ML. I’ve been in this business for so long, we’ve been talking about policy, but we never include anything related to technology because we were all the time the supporting part for finance. Okay, if you remember, credit and collection, always supporting pass for salespeople. Now, it’s the reverse shifting because of the whole technology. One of the speakers mentioned today that’s before the bank used to call the Treasury manager to sit with them and look at the leverage they have when they do the exchange for the Treasury. Now the bank called the Treasury Department, and the credit people to sit together to make sure that both of them are working on a policy in place to prevent anything from happening. This is where the force that’s coming behind the scene for artificial intelligence and machine learning.

[14:10] Moustapha Oud Ibn Mogdad:

Credit policy, as I mentioned earlier, none of you raised your hand and said that you included the recession part of your policy. Maybe it’s time for you to review your policy and to understand geopolitically what’s happening. The perfect example of the UK and Europe. A few years ago, nobody was talking about it. Now. It’s reality, in fact, so are you going to change your policy, like the day that’s happened? Or you want to look at the policy before and prevent it? The same thing: Are you going to change your risk management and assessment based on what’s happening right now as a catastrophe? for example, or what you know as a natural catastrophe or first measure coming or government regulation or you want to do it after the fact. So when you do it after the fact for sure, you will be losing money in between the time that you re manage or your readapt yourself.

[15:08] Moustapha Oud Ibn Mogdad:

So by being more proactive, and going now to your credit policy and reviewing it, you will have enough time to go and to do your job with your team and make your case in front of your colleague or your finance people to help the company for the risk policy. Now, there are three trends here. There is the analytics, there is the cloud and the integration system. Whatever one you choose, I can tell you that the best one is the cloud system because the cloud-based system will allow if you are a big corporation, it’s allowed everybody in the corporation to access the same information at the same time. It’s real-time when you know you when you use an integrated system, it can look at the other process but there is some complexity. My main subject here is not to compare these three systems. It is just to tell you that’s basically the cloud solution is the best solution when you are looking to credit policy, that’s global.

[16:12] Moustapha Oud Ibn Mogdad:

There is some major challenge and strategy to achieve best in class performance as you know, the 10 key challenges while revamping your credit policy as and I’m going to go through them very briefly, corporate alignment, international sales, mastering technology, economic and market stability, risk management, working with sales, information management, performance management, credit analysts and staffing. These are the 10 key challenges while you are revamping your credit policy that you have to include in your credit policy if you missed one of them. According to all the data that we have gathered and much research has gathered you still have something missing parts of your credit policy to align globally.

[17:02] Moustapha Oud Ibn Mogdad:

There are also four key strategic levers to achieve best in class performance. The number one is aligned with corporate vision. Number two, it’s improved customer experience. Number three, it’s to safeguard cash flow. And number four, its data handling. And when we talk about data handling, the most important is the analytic side of the data handling. You can carry millions and trillions of data in your company and if you don’t have the right tools to analyze to make the analysis for the data, then there is no need for it. As you may know, we have to keep a record for seven years if you are in North America, it’s seven years to keep your record so when the US are you doing with all these seven years of record if you don’t go back and use a software tools to make sure that you analyze all the data perfectly, there is no need for it. It’s like you know old stuff that you have somewhere in your basement or backyard and you’re not using it.

[18:05] Moustapha Oud Ibn Mogdad:

How are you using technology to improve your credit policy? Quick question. Are you using now any technology to improve your credit policy? No. Yes, no. It doesn’t matter. Any question?

[18:32] Moustapha Oud Ibn Mogdad:

Yeah, no, we have a few minutes for questions. Yeah. Any question, any comment? I know it’s a lot of things to digest at the same time at the end of the day.

[18:50] Moustapha Oud Ibn Mogdad:

I have a question for myself. Make it easy for you. While I was working with Livingston International, it’s actually a Border Agency customer. We do clearance between Canada US and Mexico, and sometimes Europe. We had an issue with the border in Mexico and the biggest problem we had in Mexico is that the paper that you need to fill out for the tracking the track going down from Canada to the US to Mexico when they get to Mexico the regulation change about the filling out of the paper. So the driver was stuck there for almost two to three days. And each time we get the same call, we cannot cross the border because we are missing such and such paper. The first reaction was what we have to do to change our policy to make sure that it includes all this paper for our customers. Because we are a clearance company. We are not a transportation company. We do just clearing the paper. Between the border, why do we have to change? The first thing we have to change is our policy. And policy means training for people. So we went through three months of training for all our customers. And on top of that, we add an additional few days, for if there is a new employee coming on board, please send them over. We organize a big facility for you. We have a lunch offer for you if you come to coffee’s free alcohol, no. So you come and we give you the training. And that’s helped us tremendously because we were able to change our policy to make the customer aware about what’s happening in the border in Mexico, and of course, to reduce the costs for us because of three days if the cost the driver is not delivering, we get to pay the penalty.

[20:52] Moustapha Oud Ibn Mogdad:

Yeah. That’s, that’s an example. Any question. Yeah, go ahead.

[20:58] Audience:

Mostly out of curiosity, you’re talking about tariff as a macroeconomic factor I guess. You mentioned that Cat moved, I guess some part of their operation to the port city to avoid that tariff. What’s the uniqueness that allows them like how that works?

[21:13] Moustapha Oud Ibn Mogdad:

Facilitate the tariff for them because they had an issue with a tariff between one city and another city they are the city was located in a different state. And since they are located in that state, they have to have an additional paper and tariff on the state. So by moving close to a port, they will eliminate all that paperwork and tariff that they have to pay in a smaller city.

[21:36] Audience:

Okay, now let’s appreciate that. Better thanks.

[21:39] Moustapha Oud Ibn Mogdad:

Because you know, every city and just as a piece of back information you have to understand that some cities put a certain tariff on a big lorry you call it lorry in the US yeah? Okay, sorry.

[21:54] Moustapha Oud Ibn Mogdad:

Yeah, sorry, a big tracker.

[21:56] Moustapha Oud Ibn Mogdad:

So when you have a big tracker in a certain city, they put certain terrorists taxes on the track. Imagine you have 100 tracks, and all these hundred tracks exceeded, I don’t know 1000 or 2000 metric tons. And the city will tell you because you’re moving your track for blah blah blah we’re gonna have to pay an additional tax of $500 per track. So that will go to your cost by moving your facility from that city to another city close to the port because most of the cities in any port by nature, have a free industrial zone where a tracker can move their track without having to pay taxes. So by moving your facility from that city, to another city, you already reduce all this nonsense taxes that are being implemented on you. And that’s what cats have been doing in the US personally and in Canada too.

[22:58] Moustapha Oud Ibn Mogdad:

Any questions? Thank you very much for attending.