Continued deflationary trends in many markets around the world are creating
greater pressure for risk prevention in order that margins can be maintained.
Customers and consumers are increasingly value driven. In this challenging
world, there is a growing recognition that creative pricing strategies combined
with effective supply chain management provide opportunities for significant risk
capital cost reduction and yet increased profits.
This paper presents evidence and a new model to support this viewpoint and
suggests an approach to supply chain alignment that can enable cost reduction
opportunities to be identified and higher profits to be achieved through
collaborative strategies.
For a good risk management the bank uses, among other figures, RORAC,
RAROC and RARORAC to minimize the risk that each credit-borrower brings
along. In the financing sector, therefore, they created the credit-ranking system.
Now the next question would be, why not implement that credit-ranking in
logistics to minimize risks in order to create a certain risk capital as security.
Especially in the airfreight segment, where there is a lot of environmental risk
involved, there has to be created a new way to prevent from high unexpected
losses.
The question that has to be answered
Table of Contents
1. Introduction
2. RAROC as a Financial Instrument to Increase Value of a Company
I. RAROC
II. Value-Based Management (VBM)
III. Rating
3. The New Era of Risk Prevention in Logistics: Risk-Adjusted Price-Rating or Risk-Based Bonus?
4. Conclusion
Objectives and Topics
This paper examines the applicability of the Risk-Adjusted Return on Capital (RAROC) concept, traditionally used in banking, as a financial instrument for risk prevention in the logistics sector. The primary objective is to develop a model that integrates risk-adjusted pricing or bonus systems into logistics management to minimize unexpected losses and secure capital without compromising client relationships.
- Theoretical foundation of RAROC and Value-Based Management (VBM).
- Implementation of credit-rating concepts in supply chain logistics.
- Comparative analysis of risk-adjusted pricing versus risk-based bonus models.
- Operational strategies for mitigating financial risks in the airfreight segment.
Excerpt from the Book
Option two: Risk-Based Bonus. What could that be? A bonus system. A bonus system that rewards customers who were in good shape throughout the year. What does good mean in this case? Good in the means of not having caused any financial harm with any unexpected risks to the logistics or airfreight. This model is comparable to the private health insurance in Germany. The insurance lets you pay annually your quarterly or monthly payments in order to be insured in case something might happen to you and you need to see the doctor. As a motivation, not to use the insurance and its services too often, they offer you your annual payment back at the end of the year if you did not go to the doctor at all throughout the year. So, how could we imply this into logistics? The customers, everyone no matter from what financial or risk status they are coming from, they have to pay an annual fee. They can chose if they want to pay it each time they use the service or if it is a frequent customer annually (adding an extra bonus on that one). At the end of the year, when nothing happened that could have harmed the airline, in the sense if the customer was a “good boy” that he gets a big portion such as 95% of the fee back. The rest would be invested in the organizational and administrative work annually.
Summary of Chapters
1. Introduction: This chapter highlights the pressure on logistics providers to implement risk-prevention strategies and proposes the adoption of banking-sector financial instruments like RAROC.
2. RAROC as a Financial Instrument to Increase Value of a Company: This section defines the core concepts of RAROC, Value-Based Management (VBM), and the Rating system, explaining their utility in risk identification and performance evaluation.
3. The New Era of Risk Prevention in Logistics: Risk-Adjusted Price-Rating or Risk-Based Bonus?: This chapter evaluates two specific models—Risk-Adjusted Price-Rating and Risk-Based Bonus—as potential frameworks for managing financial risk in logistics operations.
4. Conclusion: The concluding chapter synthesizes the findings, suggesting that while RAROC is difficult to apply directly, a risk-based bonus model offers a practical, operational approach for logistics risk management.
Keywords
RAROC, Value-Based Management, Logistics, Risk Management, Airfreight, Credit-Rating, Risk-Adjusted Price-Rating, Risk-Based Bonus, Supply Chain, Economic Capital, Financial Instrument, Shareholder Value, Risk Prevention, Performance Evaluation
Frequently Asked Questions
What is the core subject of this paper?
The paper explores the integration of financial risk management tools, specifically RAROC, into the logistics industry to help companies mitigate unexpected financial losses.
What are the central themes discussed?
The central themes include the translation of banking risk assessment metrics to logistics, shareholder value planning, and the development of incentive-based risk models for airfreight.
What is the primary research goal?
The main goal is to identify a viable model to implement risk capital considerations into logistics pricing structures without alienating existing clients.
Which methodology is utilized in this study?
The study utilizes a conceptual and analytical approach, drawing on established banking theories (RAROC, Rating) to propose and evaluate new operational strategies for the logistics market.
What does the main body of the work focus on?
The main body examines the definitions of financial instruments and discusses the practical advantages and disadvantages of implementing a "Risk-Adjusted Price-Rating" versus a "Risk-Based Bonus" model.
Which keywords best describe this research?
Key terms include RAROC, Value-Based Management, Logistics Risk Management, and Risk-Based Bonus systems.
Why is the "Risk-Based Bonus" model considered superior to "Price-Rating"?
The author suggests the bonus model is fairer as it applies a flat fee structure, reducing the complexity and conflict involved in attempting to define a customer's specific risk status for pricing.
What is the role of an international data-basis in the proposed model?
An international data-basis is proposed to prevent the misuse of the risk-based bonus system by allowing logistics companies to monitor client behavior across borders.
- Quote paper
- Angelina Freshta Farzam (Author), 2007, Risk-Adjusted Return on Capital as a Concept in Value-Based Logistics Management, Munich, GRIN Verlag, https://www.grin.com/document/135548
