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By DAN REYNOLDS, senior editor of Risk & Insurance®

One of the more exciting developments in risk management recently has been the increased focus by forward-thinking people on vetting the ethical standards and financial stability, not only of their own shop, but of the shops of their trading partners.

If anyone needed any more schooling on that topic, the implosion of credit-default swaps and collateralized debt obligations and the damage that has inflicted on the financial sector--and by extension, the rest of the world's economy--should have driven the point home, amply.

Imposing best practices on trading partners today is considered vital, but how does one secure an increasingly global trading community? Therein lies the rub.

On April 3, the Intangible Asset Finance Society hosted a noon conference call with its Ethics and Sustainability Chair Robert Rittereiser on the topic of what could be described generally as third-party risk.

Rittereiser is a veteran of the financial services sector but is now aligning himself with companies and associations that are attempting to fight the good fight in the area of intangible asset and global supply chain risk management.

In Rittereiser's deep past, he was a chief financial officer and chief administrative officer of Merrill Lynch & Co. and a president and CEO of E.F. Hutton. On Wall Street, according to press coverage from his glory days, he had a reputation as a guy people hired to solve problems.

These days, he is on the board or serving as an officer with several risk management companies, including the Pittsburgh, Pa.-based companies Zhi Verden and Steel City Re.

Rittereiser was on Wall Street back in the late 1960s when the securities industry almost collapsed because of poor processes. Trades back then were recorded on paper, and the system wasn't able to handle the increases in volume it was seeing. By the early 1970s, the system was breaking down so frequently that trading was suspended on average one day a week.

"There were very few things in life that you could point to that were more inefficient than they were at that time," Rittereiser said.

But that industry, until it was hamstrung recently by credit-default swaps, got its act together. It created the Security Industry Automation Corp., which became a data processing house for exchanges and ensured that trading information from each trading house was recorded and submitted back to that firm in a secure and timely fashion.

That's exactly what needs to happen in the world of supply chain management now, Rittereiser said on Friday.

Google the names of Cadbury Schweppes, Kellogg and Mattel, and you will find numerous references to reputational harm those companies have suffered due to chinks in their supply chains: Salmonella in peanut butter, melamine in milk and lead in the paint on toys being just some of the well-publicized supply chain integrity failures.

Rittereiser's company, Zhi Verden, is marketing its own global supply chain management system, Global TradeMaster which is based on supply chain management technology developed by Northrup Grumman for the U.S. Department of Defense.

"When we looked at the issues that management faced in implementing their policies through their own internal systems we basically concluded that a different model was needed," Rittereiser said on Friday.

There are other systems out there that are endeavoring to do what Global TradeMaster does, which is to link such things as sourcing and shipping information from global trading partners with a company's internal tracking systems to create a transparent and manageable record of chain of custody. We're not going to get into a comparison of those systems here.

But the challenges of such systems, according to Rittereiser, are that, at this stage, they can be extremely time-consuming and expensive to operate.

The hopeful part is that the financial services model, and the success it had until unmonitored global credit-default swaps did it in, can serve as a blueprint for supply chain risk management systems.

"Basically what we are saying is that the importers who are in effect the buyers of goods are the equivalent of the exchanges. They are initiating a buy order, and they are placing that buy order with a manufacturer who today they link with almost on a one to one basis or to whatever current system they have built between their system and the manufacturer's system," Rittereiser said.

In his talk on Friday, Rittereiser wasn't so much pitching his own system as he was pointing to the fact that the timing might not ever be better for companies to get a handle on global supply chain risk and determine for themselves which business processes management technology is going to get them there most efficiently.

The crisis in finance has driven home two points: We live in a world, according to Rittereiser's data, that has gone from $10 billion a day in cross-border trade transactions to $10 billion a second, as of 2004, in such exchanges. And the global economic crisis has served to illustrate how very much dependent global trading partners are on the integrity of each other's processes.

"We think that the conditions in the world today are a very good time for this to be developed and implemented," Rittereiser said.

April 7, 2009

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