Case Study: Risk Management

Inside Alliance Grain Traders' calculated approach to the unknown

Written by Michelle Warren

Alliance Grain Traders Regina Five-year growth: 1,000%

When Alliance Grain Traders Inc. bought a factory in North Dakota to fill its first order from the U.S. government, Murad Al-Katib had high hopes for his firm’s future as a supplier to the world’s biggest customer. Then the factory burned down.

Alliance’s insurance company figured there was no way Alliance could get the plant up and running again in time to deliver the order. “But we wanted the U.S. government to know we were going to be a very reliable supplier,” says Al-Katib, president and CEO of the Regina-based staple-foods processor. So, he jumped in his car that snowy day in December 2007 and drove 300 kilometres to the factory. There, he gave his managers a tough assignment in the midst of a harsh prairie winter: to have the plant back in business within 90 days.

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By Day 60, the factory was processing yellow split peas for the big contract with the U.S. Department of Agriculture — even though it was operating without a roof at 27 below. And by Day 87, the facility was fully operational, complete with a new roof.

The firm spent heavily to recover from this crisis. But if Alliance hadn’t made risk management integral to its business plan from Day One, this spending would have hurt the firm’s bottom line. When the fire erupted, Alliance had a form of protection for the factory that few firms bother with: business-interruption insurance. This saved the day financially by covering payroll and other key costs during the rebuilding.

Alliance’s close attention to risk management doesn’t mean it’s timid. In fact, it has expanded aggressively, growing by 1,000% over five years, to 2009 sales of $388 million. Alliance derives 95% of its revenue from exports, selling “pulse” crops such as lentils, peas, beans and chickpeas to packagers, canning companies, wholesalers and retailers in 85 countries. And it remains relentless in expanding into new products, such as rice and pasta, and markets, such as Turkey, India, Bangladesh and North Africa.

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But Al-Katib has always understood that a keenness to grow shouldn’t blind you to the attendant risks, whether a fire in your plant or a global financial meltdown. Although you can’t shield your firm entirely from such risks, you can take measures to reduce the damage substantially. “Companies that don’t take the time to mitigate these risks and manage them will not be successful,” says Al-Katib.

Alliance has become a star exporter by participating in — and vastly accelerating — a major shift in Saskatchewan agriculture. Farmers hit by a glut of traditional crops such as wheat have diversified en masse, many of them into pulse crops. The province is now the world’s largest exporter of peas and lentils. And production continues to soar: Saskatchewan farmers are on course to plant three million acres of lentils this year — twice the acreage of two years ago.

Al-Katib — who, as a trade officer with the Saskatchewan government, observed this shift gathering force — saw an opening to build production facilities in the province so it would become more than just an exporter of raw products. He built highly efficient processing plants in Saskatchewan, part of a network of 21 factories in Canada, the U.S., Australia and Turkey that source, clean, split, sort and bag pulse crops. Alliance’s plants have gained an edge in the market through proprietary technologies such as optical sorters that separate lentils by colour to satisfy tastes that differ by country.

“Part of our business model is that we can sell anywhere,” says Al-Katib. “But if we can’t make sure we’ll collect our money and hedge our currency, we won’t be able to achieve growth. Risk management is an essential part of our strategy.”

Managing financial risk is one element in this. Al-Katib’s first hire was a chartered management accountant who designed a product-management system linked to the firm’s general ledger. The custom software tracks every detail of every deal, from sales and inventory to profit-and-loss forecasts. This gives Alliance a true understanding of its cost structure so it doesn’t run into any surprises after fulfilling a contract. The firm knows exactly how much product it needs, the price it must pay in order to turn a profit and how quickly it needs to process and ship the product. “Everything we do is linked, and this makes things much more tight,” says Al-Katib.

Alliance also reduces risks by running its own freight department to oversee export documentation, cargo insurance and getting goods from the factory to the client’s door. Because Alliance sells food products, its contracts specify tight turnarounds and delivery dates. If Alliance fails to meet these, its clients can refuse to pay — leaving the food to go to waste and Alliance to suffer a big loss. Al-Katib says freight management is the key to avoiding this, which is why he had opted not to outsource it.

You can’t prevent some risks, such as major currency fluctuations; you can only limit the damage. Alliance, like other export-focused Canadian firms, largely incurs costs in loonies and revenue in U.S. greenbacks. And the Canadian dollar, which was trading at US65¢ when Al-Katib launched his firm in 2001, has since staged a record-breaking run-up that has slashed the value of Alliance’s exports.

Fortunately, Al-Katib didn’t bank on our dollar staying put. Pulse crops aren’t traded on futures markets, so Alliance uses currency hedging to offset its exposure. “If we hadn’t done that, it would have eroded our profits,” says Al-Katib.

Another key to Alliance’s risk-management strategy is devoting serious face time to customers. Al-Katib spends about 150 days a year travelling and meeting clients. He and other senior managers gain first-hand insights into each country’s banking system and how a client’s relationship with its customers may affect its ability to pay Alliance. “You’re only as strong as your clients’ clients,” he says.

The financial crisis of 2008 put Alliance’s risk-management strategy to a severe test. “One day, we had a major book of business and cargo flowing to 85 countries,” says Al-Katib, “and the next day, a quarter of our world distribution had no access to credit facilities.”

Alliance drew on its in-depth knowledge of its clients to distinguish among those that were strong enough to find new sources of credit and those that were too risky to stick with in a credit crunch. Alliance moved fast to divert its cargo away from the latter group. After a juggling act for four manic months, Alliance consolidated its client list into what Al-Katib calls “the cream of the distributors.”

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Even so, some clients stiffed Alliance. But the firm emerged almost unscathed because it had insured its export accounts receivable through Export Development Canada. “If we hadn’t been on the ball, it would have cost us millions of dollars,” says Al-Katib. “Instead, it cost us thousands.”

Robert Winslow, a Toronto-based analyst at Wellington West Capital Markets Inc., says Alliance’s sound risk-management practices are reflected in “how well they’ve managed their business over the past 24 months during an obviously tumultuous time in the capital and commodities markets.” He expects Alliance’s revenue to top $850 million by next year.

“We’re on a pathway to becoming a billion-dollar company,” says Al-Katib. “My goal is to become a globally recognized food processor.”

As for the inherent risks, he’s ready but doesn’t sweat it: “It’s so exciting, I couldn’t imagine being in anything else.”

Originally appeared on PROFITguide.com