Risk & Value Management - Essay Example

Table of Contents Assessment of Risks faced by AutoPlast Ltd. 4 Political 4 Description of the Risk & Likelihood 4 Mitigation Plan 5 Economic 5 Description of the Risk& Likelihood 5 Mitigation Plan 5 Social 5 Description of the Risk & Likelihood 5 Mitigation Plan 6 Technological 6 Description of the Risk & Likelihood 6 Mitigation Plan 6 Legal 6 Description of the Risk & Likelihood 7 Mitigation Plan 7 Environmental 7 Description of the Risk & Likelihood 7 Mitigation Plan 7 Competitive 8 Description of the Risk & Likelihood 8 Mitigation Plan 8 Disaster Response & Contingency plans 8 Environmental hazard 8 Hazard 1: Flooding 8 Disaster response 9 Contingency Plan 9 Hazard 2: Earthquake 9 Disaster response 9 Contingency Plan 10 Technological hazard 10 Hazard 1: Damage to machines 10 Disaster response 10 Contingency Plan 10 Hazard 2: Disruption of IT services 11 Disaster response 11 Contingency Plan 11 Value chain analysis for performance improvement 11 Primary Activities 12 Secondary Activities 12 Cost Reduction Techniques 13 References 15 Assessment of Risks faced by AutoPlast Ltd. Business risk may be defined as the probability of losses associated with the assets and the future earning potential of a business firm (Petty & Palich, 2009,p.603). Assets of a firm are not only its business infrastructure but also its employees, customers and the reputation of the firm. Business by its very nature is a risky proposition. A business venture not only faces the risk of being non profitable but also faces many other risks which are caused by the macro and the micro environment in which the business operates. In this section, we will discuss the risks which the company AutoPlast ltd. faces to its factory. The risks are many and are discussed under various headings. Political Political risk may be defined as the risk to the assets of an entity due to exposure to a political event (Moran, 2001, p.83). Political risks are related to a specific action from the government which can reduce the profitability of the firm. Political risks can be of 2 types – macro level political risk and micro level political risks (Moran, 2001,p.85). A macro level political risk is related to the general business environment of the country whereas a micro level risk is associated with the politics of a particular place and is site specific. Description of the Risk & Likelihood The risk faced by AutoPlast is clearly a micro level risk. Due to the pollution caused by the chemical leak from the site and the fire outbreak; the resentment against the factory among local population is on the rise. This resentment can force the local administration as well as various political parties to take action against the factory .Possible risks include expropriation of property, repudiation of the contract for the factory and civil disturbance in the form of protests against the factory. The likelihood of the risk is medium as the factory has been in existence for the past 25 years. Although people may be angry due to the current issues but long term relationships will help the factory tide over the risk. Mitigation Plan Mitigation plans for this risk can be taking the political representatives into confidence; making the people aware of the contributions by the factory and working with the administration to ensure no future repeat of the disasters take place. Economic Economic risk to a factory occurs when the macroeconomic situation is not good and the whole economy is suffering recession or a slowed growth (Chapman, 2011, p.21.1). Description of the Risk& Likelihood AutoPlast faces economic risks due to two factors – one is the competition from cheaper products from Eastern Europe which places a question mark over the viability of the factory and other is the possibility of additional investment to safeguard the factory from further hazard. This investment may add to the cost of production making the factory run into losses. Likelihood of this risk is high due to growing competitive pressure and the pressure on the company to prevent further disasters. Mitigation Plan The risk can be mitigated in two ways – either the factory can be shifted to Eastern Europe in order to take advantage of low costs or the positioning of the products of the factory can be changed. Instead of competing over low prices, the factory can compete on superior quality Social Social risks are the risks which emerge due to the impact of a firm’s operations on the society (Brebbia, 2010 ,p.128). Description of the Risk & Likelihood The recent incidents at AutoPlast have put the security of the citizens in the area at risk. They are suffering from respiratory diseases and also face the problem of polluted river water due to the chemical leak. The factory can operate in an area only if its net social contribution is positive (Brebbia, 2010 ,p.131). The factory till now has contributed immensely to the livelihood of the area. However a harmful impact on the health of citizens can nullify the employment gains and may lead to large scale protests. The likelihood of the risk is high as people are angry at the recent events and one more incident can lead them to protest the presence of the factory. Mitigation Plan The factory should not only address the concerns of the society but should also be seen as doing so. In order to do this, constant negotiations and consultations with the civil society groups and ordinary citizens should be undertaken to prevent a social boycott of the firm. Technological Technological risks are the risks associated with using outdated or irrelevant technology in the operations of the firm (Branscomb & Auerswald, 2003). Description of the Risk & Likelihood The factory has been operational for 25 years in the same area. During this time, the technology which was feasible to prevent chemical leakages and fire outbreaks is likely to have become obsolete. New technology will prevent such disasters even in the time of floods. Failure to upgrade to new technology can lead to loss of reputation and business for the firm. The likelihood of this risk is very high. Mitigation Plan The mitigation plan involves investing in the latest disaster management technology which will serve the factory in difficult times and prevent further chemical leakages or fire outbreaks. Legal Legal Risks are the risks to the finances and the operations of a firm due to court cases and orders (Jasanoff, 1994, p.45). Description of the Risk & Likelihood AutoPlast has already been involved in two major accidents in the area. Due to these actions it is likely to face legal actions from the victims, civil society groups and government. The likelihood of the risk is high as some cases have already been lodged against the factory. Mitigation Plan The first line of action should be to encourage out of court settlement by the victims of the 2 accidents (Jasanoff, 1994 ,p.61). This reduces the legal burden and improves image of the company. The factory should also take responsibility for the accidents and comply with the court directives to prevent further accidents. The financial department must make arrangement for the likely compensation and settlement amounts arising due to court cases. Environmental Environmental risks refer to the harm caused to the surrounding environment due to the operations of the firm (Covello & Merkhoher, 1993). Description of the Risk & Likelihood There are two major environmental risks due to AutoPlast operations – Air pollution due to further fire outbreaks and water pollution due to contaminations of the river by chemical leakages. Both these risks will affect the health of the citizens by poisoning the drinking water and causing respiratory problems due to polluted air. Contamination of river can also destroy the fishing community. Mitigation Plan The factory should take responsibility for contamination of the river and make efforts to purify the river. Investment should be made to ensure no such incident occurs in the future. Loss of livelihood for the fisherman due to this pollution should also be compensated. Competitive The risk to the firm due to competitors, both domestic and foreign may be defined as competitive risk. Description of the Risk & Likelihood The firm is facing immense competition from factories located in Eastern Europe due to their low cost products. Apart from this the recent accidents in the firm can be used by competitors to their advantage as no one likes to be associated with a firm which is mired in legal cases and social protest. These two issues can cause the profits of the firm to erode and cause loss to the shareholders. The likelihood of this risk materializing is extremely high. Mitigation Plan There are two alternatives which the factory can employ – use of high end technology to reduce costs and improve technology or shifting its operations to Eastern Europe in order to take benefit of the low cost environment prevalent in these countries. Disaster Response & Contingency plans Contingency Plan refers to the backup plan or the worst case scenario plans which are adopted by a firm in order to ensure business continuity during disasters such as flood, earthquake etc (Kasse, 2008 ,p.117). Disaster recovery plan refers to the processes, policies and procedures which are followed by a company in order to ensure business continuity and recovery during any man made or natural disaster (Sandhu, 2002).This section discusses some hazards which AutoPlast is likely to face, contingency plans during the hazard and a recovery plan for each of the hazards. Environmental hazard Hazard 1: Flooding As the area has been witnessing heavy rain in the recently, the factory faces the probability of flooding. Flooding of the factory premises had recently caused chemical leakage into to the rivers which polluted the river causing damage to the fishing industry. Flooding also causes business loss for the factory as it leads to shutting down of the operations for few days. This leads to loss of customers for the firm. Disaster response Before Flooding: Factory should request the local metrological department to provide prior warning of the duration and intensity of floods. Once a flood warning has been given the parts of the factory likely to be compromised due to flood should be identified and a decision to either shut down these areas or protect them should be taken (Institution Of Chemical Engineers, 2003). Harmful chemicals should be shipped off from the site as quickly as possible. During Flooding: Alternate meeting site to ensure continuity of critical business operations needs to be prepared if the current site becomes inaccessible. Effort should be made to ensure the supply of essential services like electricity for the site. After Flooding: The site and surrounding areas should be surveyed quickly to assess the damage done and the time to be taken for restoration of operations. A PR professional should be engaged to deal with local media and concerns raised by them. Contingency Plan In order to ensure continued supply to customers’ inventory of average 2 month orders should be maintained by the company. This inventory should be maintained at a different location. Hazard 2: Earthquake An Earthquake can be very disastrous as it usually strikes without warning. As AutoPlast is located on the banks of a river, an earthquake will not only destroy the factory but will also cause long term damage by leakage of harmful chemicals in the river. Disaster response Before Earthquake: The structure of the factory and all its components should be checked frequently in order to ensure that they are made to withstand high intensity quakes. The employees should be trained periodically as to how to respond during earthquake. A plan should be made as to what to do with harmful chemical if quake strikes (Gustin, 2010 ,p.165). During Earthquake: The only priority during this period should be the safe exit of employees from the premise without any loss of life or limb. The other high priority task is to prevent the harmful chemical from being discharged in the river (Gustin, 2010 ,p.168-169). The trained task force for this purpose should immediately swing into action. After Earthquake: Arrangements should be made for the company to continue operations from a temporary location. The assessment of damage to the factory and surrounding areas should be done as quickly as possible and time and finances required to restore original working conditions should be estimated. Contingency Plan Proper inventory should be maintained be maintained to ensure customers are serviced for 2-3 months without any delay. Technological hazard Hazard 1: Damage to machines Leakage of chemicals or flood water can cause the machines in the factory to stop functioning leading to loss of production. Disaster response In order to restore production quickly the company will have to ensure that the problems in the machines due to flooding or chemicals are rectified as quickly as possible. The storage of chemicals should be done in such a way that no further leakage of chemicals takes place. The company should also make flood banks to prevent water from entering the machines. Contingency Plan Adequate inventory should be maintained to ensure continued supply to the customers till the time the machines are dysfunctional. Hazard 2: Disruption of IT services No factory in the current age is isolated. It is connected to its suppliers and customers through IT services. Disruption in these services or the loss of data can lead to loss of customers for the company. Disaster response When IT services are disrupted the company needs to ensure that the services are restored as quickly as possible. In order to ensure that there is no loss of business due to disruption of information technology the company should have a backup of important data at another location. One provider should not be relied on solely to provide communication, there should be another provide on which the company can rely on during crisis situations. Contingency Plan Two types of contingencies need to be prepared for the loss of Information technology systems – one is data back up and the other is alternate communication system (DIANE Publishing Company, 2004). The server for data back up and the alternate communication plan should be located in another geographical location which is unlikely to see a technological blackout at the same time. Value chain analysis for performance improvement Value chain analysis involves separating the business systems into a series of value generating activities. The cost of these activities needs to be lower than the value the customer is willing to pay in order to ensure profits (Porter, 2008 ,p.36). We will now analyse the value chain of AutoPlast with a view to improve profit margins. Porter says that better margins can be derived from the value chain in 2 ways – either through cost advantage or through activities which differentiate the product of the firm from competitors (Porter, 2008). We will look at ways of cost reduction in the value chain. The diagram shown below shows the generic value chain as described by porter and we will also discuss these activities in case of AutoPlast. Primary Activities Inbound Logistics: Transportation for raw materials, warehouses for storing the raw materials Operations: Formation of plastic products inside the factory Outbound Logistics: storing of finished plastic products and distribution of the products to automobile companies Marketing & Sales: Identification of automobile companies to sell plastic components Service: Keeping in touch with the automobile firms regarding quality of the plastic components and ensuring that quality of the plastic parts is up to the specifications. Secondary Activities Procurement: Procurement of dye for making the plastic components, procurement of molten plastic, procurement of machines Human Resource management: Ensuring training of employees and keeping them up-to-date with technology Infrastructure: machines in the AutoPlast factory and their maintenance, infrastructure like electricity, water etc. Technology Development: up gradation of outdated machines, adoption of latest technology for making plastic components Cost Reduction Techniques As the factory is facing intense competition from low cost producers of Eastern European countries, AutoPlast has to look for ways to squeeze out extra cost in order to remain competitive. Some ways in which the cost can be kept down in the value chain have been described here – Procurement of dye from emerging economies like China in order to reduce costs. Outsourcing of employee management for most of the employees can be a way to reduce costs. The company can look to hire at least 70% of its staff which is involved in day to day activities from contractual firms. This will drastically reduce the human resource costs. Only managerial and technical staff should be kept by the company on its payroll. Outsourcing activities like security, cleaning activities in the factory, canteen services to third parties. Use of the river to transport inbound and outbound materials instead of rail and road transport. River based transport has the advantage of low costs. Adoption of operations management techniques like just in time in order to ensure that excessive inventory and wastage of raw materials do not take place. Recuing cost though economies of scale by keeping the factory operational in double shifts. For this to be accomplished, the marketing division will have to ensure sufficient orders. This will also create goodwill by generating extra employment. The above points if applied can drastically reduce the cost of production for the factory and help it to compete with new companies which have been set up in Eastern Europe. References Covello, V. and Merkhoher, M. (1993) Risk Assessment Methods: Approaches for Assessing Health and Environmental Risks. New York: Springer. Moran, T. (2001) International political risk management: exploring new frontiers. Washington D.C.: World Bank Publications, p.83 - 85. Branscomb, L. and Auerswald, P. (2003) Taking Technical Risks: How Innovators, Executives, and Investors Manage High-Tech Risks. New York: MIT Press, p.44 - 47. Brebbia, C. (2010) Risk Analysis VII & Brownfields V: Simulation and Hazard Mitigation/ Prevention, Assessment, Rehabilitation and Development of Brownfield Sites. Southampton: WIT Press, p.128 - 132. Chapman, R. (2011) Simple Tools and Techniques for Enterprise Risk Management. 2nd ed. Sussex: John Wiley & Sons, p.21.1 - 21.6. DIANE Publishing Company (2004) Guidelines for Contingency Planning For Information Resources Services Resumption. Austin: DIANE Publishing, p.5 - 8. Gustin, J. (2010) Disaster and Recovery Planning: A Guide for Facility Managers. 5th ed. London: The Fairmont Press, p.165 - 169. Institution of Chemical Engineers (2003) Hazards 17. Warwickshire: IChemE, p.149 - 151. Jasanoff, S. (1994) Learning from Disaster: Risk Management after Bhopal. New York: University of Pennsylvania Press, p.44 - 66. Kasse, T. (2008) Practical Insight into CMMI. 2nd ed. New York: Artech House, p.117 -120. Petty, J. and Palich, L. (2009) Small Business Management: Launching & Growing Entrepreneurial Ventures. 15th ed. Mason: Cengage Learning, p.603 - 604. Porter, M. (2008) Competitive Advantage: Creating and Sustaining Superior Performance. 20th ed. New York: Simon and Schuster, p.36 - 52. Sandhu, R. (2002) Disaster Recovery Planning. New Delhi: Premier Press. Read More