Leroy Merlin sometimes produces similar products in different factories with different suppliers. What types of risks are being avoided by this strategy? Russia, has long been an important growth market for global firms. With a population of148 million, Russia's economy has benefited from high global energy prices. The country'shuge oil and gas sector accounts for 20% of GDP and 65% of its exports. In 2014, however,the country faced a sudden drop in its economy. The collapse in the oil price (from morethan $100 per barrel to less than $30 by the end of 2015) decreased export earnings.Sanctions applied by the United States, the European Union, and other nations in responseto Russia's relations with Ukraine escalated the economic challenges. GDP fell by almost5% in 2015, and the rapid devaluation of the ruble (which lost two-thirds of its value againstthe dollar by the end of 2015) drove up the price of imports, pushing down consumptionof imported goods and services by more than 25%.The depth and severity of the crisis hit companies hard, causing many international playersto reevaluate their Russia strategy. Some decided to decrease their retail networks forexample the General Motors (GM) to extremely reduce their presence in the country. Othermultinationals, however, see today's tough conditions as a strategic opportunity. They havechosen to use the crisis, sticking to long-term development plans. Moreover, the economicsituation in the country has created a highly favorable environment for certain kinds ofsupply chain investments.In particular, the real estate infrastructure companies that serve Russian markets hasbecome dramatically cheaper. Vacancy rates for warehouse and logistics facilities inMoscow reached 13.6% by the third quarter of 2016, the highest since 2009. Tough marketconditions also meant companies with existing facilities in Russia could renegotiate leaseson favorable terms, or take advantage of additional capacity in the market. For example,Adidas has purchased the distribution center in the south of Moscow that it had previouslyleased. Adidas acquired the 120,000-square-meter building at a relatively low price from alandlord in need of capital.Another successful example is the Russian division of the gardening French retailer LeroyMerlin. Their expansion plan involves around 20 new store openings every year, and theexpanding its geographical scope. It will open its first store in Khabarovsk, which is 9,000kilometers from Moscow by road. Eric Poulet, director of supply chain at Leroy Merlin inRussia, notes that while the average Leroy Merlin store in France sells around 3.4 millionitems per year, Russian stores sell between 16 and 19 million. In France, the company'ssupply chain moves around 470 million items per year. In Russia, that number is now overI billion. To support its network, Leroy Merlin prefers to build and run its own distributionfacilities where possible. During 2015 and 2016, the company partnered with a developerto construct a 100,000-square-meter facility to the south of Moscow. 80% of the company'sdomestic suppliers are located in the Moscow area, Poulet explains, making the region animportant one for both its inbound and outbound supply chain activities.To protect their purchasing power during the crisis, Russian families switched to cheaperproducts wherever they could. For Leroy Merlin, that meant a huge demand in its lowest-priced, "basic" product categories. For a company that already operates on an "everydaylow price" basis, that meant increased pressure to keep supply chain costs down. Leroy Merlin has also worked hard to accelerate its supply chain, doubling the share of inventorythat passes through its cross-dock operations to 43% this year, with plans to increase thatto 55% in 2017.When it comes to road transportation, the crisis has created some unexpected challenges.The weak ruble and resulting collapse in the sales of imported goods meant there werefewer trucks transporting merchandise from ports in the north and south of the country toMoscow. That led to a reduction in available capacity in the opposite direction, creating acapacity crunch for Leroy Merlin, which ships a significant volume from its main Moscowdistribution centers to stores in those regions. "The cost of transport increased a lot on theseroutes," he notes.Some transportation challenges had causes unrelated to the crisis. The start of a newnational system of road tolls has increased costs and administrative complexity fortransport companies, especially for the small owner-operated motor carriers that stilldominate the market in Russia. That change took a lot of capacity out of the market andpushed up prices in 2016. Other regulatory changes have helped the business, however.The closure by municipal authorities of informal open-air markets in many regions, forexample, is encouraging more customers to switch to organized retail channels.Leroy Merlin imports about half of its merchandise, with goods arriving via multipleroutes, including ports at Vladivostok, Rostov-on-Don, and Riga (Latvia), as well as viaroad freight from Europe. The remaining 50% of the products sold in Leroy Merlin'sRussian stores are bought from local Russian suppliers and the company aims to increasethe share of local products to 80%. The push for local sourcing is important. "As a bigcompany, it is our duty to develop the community, but more local sourcing also reducesour exposure to currency risks."Among the challenges in Russia, Logistics service providers capable of delivering aconsistent, high-quality service remain hard to find. "The growth in e-commerce hasencourage rapid expansion in the logistics sector, but we now have thousands of providersall offering the same, low-quality service", "It is difficult to develop sustainable and stablepartnerships."In early 2017, things appear to be good. The price of oil has risen to a level that favorsRussia's producers, and the ruble has strengthened in response. Forecaster OxfordEconomics predicts that the country's economy will return to growth this year.

Question

Leroy Merlin sometimes produces similar products in different factories with different suppliers. What types of risks are being avoided by this strategy? Russia, has long been an important growth market for global firms. With a population of148 million, Russia's economy has benefited from high global energy prices. The country'shuge oil and gas sector accounts for 20% of GDP and 65% of its exports. In 2014, however,the country faced a sudden drop in its economy. The collapse in the oil price (from morethan $100 per barrel to less than $30 by the end of 2015) decreased export earnings.Sanctions applied by the United States, the European Union, and other nations in responseto Russia's relations with Ukraine escalated the economic challenges. GDP fell by almost5% in 2015, and the rapid devaluation of the ruble (which lost two-thirds of its value againstthe dollar by the end of 2015) drove up the price of imports, pushing down consumptionof imported goods and services by more than 25%.The depth and severity of the crisis hit companies hard, causing many international playersto reevaluate their Russia strategy. Some decided to decrease their retail networks forexample the General Motors (GM) to extremely reduce their presence in the country. Othermultinationals, however, see today's tough conditions as a strategic opportunity. They havechosen to use the crisis, sticking to long-term development plans. Moreover, the economicsituation in the country has created a highly favorable environment for certain kinds ofsupply chain investments.In particular, the real estate infrastructure companies that serve Russian markets hasbecome dramatically cheaper. Vacancy rates for warehouse and logistics facilities inMoscow reached 13.6% by the third quarter of 2016, the highest since 2009. Tough marketconditions also meant companies with existing facilities in Russia could renegotiate leaseson favorable terms, or take advantage of additional capacity in the market. For example,Adidas has purchased the distribution center in the south of Moscow that it had previouslyleased. Adidas acquired the 120,000-square-meter building at a relatively low price from alandlord in need of capital.Another successful example is the Russian division of the gardening French retailer LeroyMerlin. Their expansion plan involves around 20 new store openings every year, and theexpanding its geographical scope. It will open its first store in Khabarovsk, which is 9,000kilometers from Moscow by road. Eric Poulet, director of supply chain at Leroy Merlin inRussia, notes that while the average Leroy Merlin store in France sells around 3.4 millionitems per year, Russian stores sell between 16 and 19 million. In France, the company'ssupply chain moves around 470 million items per year. In Russia, that number is now overI billion. To support its network, Leroy Merlin prefers to build and run its own distributionfacilities where possible. During 2015 and 2016, the company partnered with a developerto construct a 100,000-square-meter facility to the south of Moscow. 80% of the company'sdomestic suppliers are located in the Moscow area, Poulet explains, making the region animportant one for both its inbound and outbound supply chain activities.To protect their purchasing power during the crisis, Russian families switched to cheaperproducts wherever they could. For Leroy Merlin, that meant a huge demand in its lowest-priced, &#34;basic&#34; product categories. For a company that already operates on an &#34;everydaylow price&#34; basis, that meant increased pressure to keep supply chain costs down. Leroy Merlin has also worked hard to accelerate its supply chain, doubling the share of inventorythat passes through its cross-dock operations to 43% this year, with plans to increase thatto 55% in 2017.When it comes to road transportation, the crisis has created some unexpected challenges.The weak ruble and resulting collapse in the sales of imported goods meant there werefewer trucks transporting merchandise from ports in the north and south of the country toMoscow. That led to a reduction in available capacity in the opposite direction, creating acapacity crunch for Leroy Merlin, which ships a significant volume from its main Moscowdistribution centers to stores in those regions. &#34;The cost of transport increased a lot on theseroutes,&#34; he notes.Some transportation challenges had causes unrelated to the crisis. The start of a newnational system of road tolls has increased costs and administrative complexity fortransport companies, especially for the small owner-operated motor carriers that stilldominate the market in Russia. That change took a lot of capacity out of the market andpushed up prices in 2016. Other regulatory changes have helped the business, however.The closure by municipal authorities of informal open-air markets in many regions, forexample, is encouraging more customers to switch to organized retail channels.Leroy Merlin imports about half of its merchandise, with goods arriving via multipleroutes, including ports at Vladivostok, Rostov-on-Don, and Riga (Latvia), as well as viaroad freight from Europe. The remaining 50% of the products sold in Leroy Merlin'sRussian stores are bought from local Russian suppliers and the company aims to increasethe share of local products to 80%. The push for local sourcing is important. &#34;As a bigcompany, it is our duty to develop the community, but more local sourcing also reducesour exposure to currency risks.&#34;Among the challenges in Russia, Logistics service providers capable of delivering aconsistent, high-quality service remain hard to find. &#34;The growth in e-commerce hasencourage rapid expansion in the logistics sector, but we now have thousands of providersall offering the same, low-quality service&#34;, &#34;It is difficult to develop sustainable and stablepartnerships.&#34;In early 2017, things appear to be good. The price of oil has risen to a level that favorsRussia's producers, and the ruble has strengthened in response. Forecaster OxfordEconomics predicts that the country's economy will return to growth this year.

Accepted Answer

RISK MANAGEMENT: Risk management is the process of identifying, evaluating, and controlling the…