Risk from the Perspective of a Project Manager - Essay Example

Determining what constitutes risk in a project, who should be responsible for risk evaluation and how it can be managed effectively BY YOU YOUR SCHOOL INFO HERE DATE HERE Introduction Business managers responsible for planning, organising and managing a project must identify potential risk factors that could impede the achievement of a project’s identified objectives. From the perspective of the project manager, risk is the effect of uncertainty on achieving project goals. Managing risk is the competency of a business manager to identify, evaluation and set a priority to certain predicted hazards or project threats that can complicate project continuity (Haneef, et al. 2012; Hubbard 2009). Risk management, therefore, is a process that avoids interruption to a project’s objectives and ensure make certain that the project does not experience complications (Sadgrove 2005). To be a competent risk manager, leaders must develop policies, procedures and best practices that can predict potential risk, measure its level of threat and effectively treat it (Haneef, et al. 2012). This report determines what constitutes risk from the perspective of a project manager. Additionally, who should be responsible for risk management activities and how it can be successfully mitigated will be investigated. Furthermore, how to productively minimise risk will also be explored in this report by applying theoretical risk management activities to a hypothetical business project. Managing risk Effective risk management involves identifying potential threats and hazards to a project. To manage risk, project leadership must determine the probability of a negative occurrence and determine the potential consequences if an undesired scenario occurs (Di Serio, de Oliveira and Schuch 2011). Risk consists of many potential threats that can impact a business’ objectives, including macroeconomic factors, internal operational concerns, market uncertainties or even the organisation’s own internal processes (Di Serio, et al.). When considering a business’ procurement model, risk management involves being able to identify potential risk opportunities and constructing plans and strategies to avoid them or maintain the integrity of the supply chain holistically (Jutner 2003). In a procurement risk management scenario, the responsibility for risk management cannot be placed on a single individual. In a large organisation, procurement models involve diverse organisational members, including the purchasing manager, sales managers, receiving department management, and inventory replenishment planning professionals (Davis 2013). Effective risk mitigation, in a procurement-related project, would involve determining how to build inventory surpluses, establish a supplier redundancy system, building agility within the supply network, and planning for rising or otherwise fluctuating costs (Chopra and Sodhi 2004). This emphasises why risk management must involve multiple organisational members, as cost-related risks, establishing new supply networks (redundancies) and building surplus capacity impact many different divisions of the organisation, including budgetary planning and also measuring internal capacity to absorb changes to the supply network in an effort to combat potential risk (PMI 2009). Determining risk probability involves all members involved in supply chain-related activities and are too complex to be measured and predicted by a single individual (Kendrick 2009). Competent and effective risk management involves multiple steps, including establishing a project’s goals, identifying potential or probable risks, conducting an analysis of identified risks, creating a treatment methodology for risk, monitoring the risk environment, and communicating with stakeholders about risk-related activities and mitigation (Berg 2010). Some best practices for managing risk include brainstorming, the utilisation of checklist instruments, the PESTLE analysis model, conducting internal auditing processes, and a variety of quantitative and qualitative instruments that assist in analysing how to align internal processes with external conditions (AIRMIC 2010). There is a need for establishing a multi-faceted and ambidextrous methodology of risk management to ensure that all potential threats or hazards are recognised and mitigated. Therefore, a productive and effective risk management system means utilising multiple models of risk management with multiple organisational members with key experience and knowledge in particular business divisions and how they intersect with other operational components of the organisation. Figure 1 illustrates these stages, reflecting a continuous cycle of risk management and control throughout the entire project life cycle. Figure 1: Risk Management Model Source: Berg, H. (2010). To illustrate risk management’s multi-faceted and multi-member requirements, proper risk management activities can be applied to a special business project involving transition to a lean procurement system. A lean system is to alter operational tasks to achieve meeting customer demands and expectations with as much emphasis as possible on efficiency. A transition to a lean system will involve redesign of customer support systems, controlling organisational performance, and making use of key organisational experts to facilitate a more cost-effective procurement and operational system. When attempting to transition to a lean system, problems can occur in many different scenarios, including ineffective decision-making by executive managers, supplier problems, cultural issues (such as change resistance), and technical problems (Taleghani 2010). Hence, this again illustrates that the responsibility for risk management cannot occur within a single department or single manager due to the inter-dependencies of multiple business divisions necessary to support a lean system transition. The first step of a risk management system is to classify risks based on their probability of occurrence and the level of threat that each identified risk poses to the project, in this case a lean transition. Figure 2 illustrates a model of risk categorisation and classification that could be instrumental in posing hazard or threat to a new lean systems project. Figure 2: Description Risk I.D. Probability Impact Threat Major Disaster (i.e. hurricane) T1 1 -5 Wrong Business Strategy Adoption T2 4 -2 Information Technology Failures T3 3 -4 Changes in currency value, or interest rates. T4 4 -3 Supplier Failures T5 3 -4 Legend: Probability: 1 – Very Unlikely; 2 – Unlikely ; 3- Possible; 4 – Likely ; 5 – Very Likely Impact Threat: -1 – Negligible; -2 – Marginal; -3 – Significant; -4 – Critical; -5 – Crisis Figure 2 represents only a handful of potential scenarios that could impact a lean systems transition project. For instance, IT failures could shut down operations or impact invoicing and inventory management systems, hence representing a critical negative consequence in the event of such a failure. Lean procurement, additionally, seeks to better control expenditures in procurement, hence changes in currency values or sudden interest rate changes represent a significant risk to the transition project. Properly classifying risk probability and threat level allows the project manager to properly allocate resources toward mitigating risk and prioritising treatment methodologies in accordance to the most significant or critical risks (Berg 2010). These potential risks identified in Figure 2 build a framework for controlling risk that can be disseminated throughout the organisation in a knowledge management ideology to facilitate communities of practice system of collaboration and reporting. Risk I.D. Risk Category Cause Risk Description Consequence Status Overall Likelihood Impact Priority T1 Major Event Natural disasters, terrorist activities Any scenario that halts distribution or the ability to ensure adequate procurement Complete disruption of business operations Active 1 Very unlikely -5 Crisis Unacceptable level of risk T2  Wrong Business Strategy Adoption  Poor leadership, poor communications. Poor pricing contract establishment, cultural resistance Loss of sales revenues, over-budget procurement  Active 4 Highly probable -3 Significant  Significant level of risk T3 Information Systems Technology Failures Software failure or complication ERP and BRP software shutdowns, invoicing system interruptions Delay in receipt of accounts receivable, inability to plan replenishment Active 3 Possible -4  Critical Unacceptable level of risk T4  Changes in currency value, interest rates  Changes to international monetary policy, economic failures in key supplier states  Loss of profit, common stock value depletion, over-expenditure in procurement Profit losses  Active 4 Likely -3 Significant  Substantial risk to profit generation T5  Supplier Failures  Supplier operational failures, bankruptcy. Inability to have a responsive supply network.  Higher costs, supply shortages, failure to meet deadlines for delivery  Active 2 Unlikely -3  Significant Substantial risk to lean methodology Figure 3: Risk Register detailing description, consequence, likelihood and business impact Figure 3, above, illustrates a risk register methodology that assesses all potential risks, in this case involving procurement, that provides a framework by which organisational members can begin developing treatment methodologies to combat risk. This framework, when disseminated amongst organisational members, also builds the ability to assign priority by categorising between significant, unacceptable or substantial according to how it would impact business objectives of the project (Flyvbjerg 2003). For instance, the executive manager responsible for coordinating a diverse supplier network can begin working on better hedging strategies in the event of interest rate changes or currency market changes and report on new investment strategies to combat such market changes. Information technology leaders involved in the lean transition project can create back-up systems or better enhance security of important operational technologies to reduce IT failures and report on these activities and complications. Reporting is critical to an effective risk management system and allows managers to maintain control over the entire risk management system (Lam 2014). In a risk management system related to a lean procurement system transition, cost control considerations are substantial. Yet another risk, in this hypothetical project scenario, could be outdated demand predictability models. For instance, under the old, standardised system of procurement, a firm may have operated under a system where production maintenance products were auto-delivered using ERP systems. A manager in operations should be assigned the role of operational risk identification to determine whether this auto delivery system is ordering parts and equipment no longer relevant to production and maintenance. If the age-old auto-delivery demand predictability model is inefficient for a just-in-time methodology, risk management activities will need to include making some products on the procurement register obsolete (electronically) and ensuring new electronic inputs to make the system more effective. Such activities may even include the operations manager consulting with replenishment teams to make all deliveries scheduled manually with no automation to avoid purchase of products no longer viable or profitable for the business model. In yet another scenario in this hypothetical project, supplier responsiveness and ability to meet the company’s demands could have a significant impact on the success of the project’s objectives for cost control and procurement efficiency. This has implications for sales managers and production experts that have direct relationships with suppliers. Risk mitigation of such a critical risk to achieving a lean methodology could be involving suppliers in all phases of product development or providing new training imperatives for suppliers so that suppliers now have a clear understanding of costs, the customer’s cycle times, and quality standards. Copacino (1997) iterates that such relationships and partnerships are critical for businesses that require rapid and dedicated response from supplier networks. There is a likelihood that suppliers, once accustomed to a client procurement system that involved auto-delivery methodology and a surplus inventory system will have difficulty adopting a just-in-time shipment methodology. Hence, in such a scenario, risk management becomes an externalised set of considerations that involves identifying potential mitigation strategies that ensures supplier compliance, effectiveness and ability to adjust its operations to meet client needs. Furthermore, a project maintains several constraints, which are inclusive of cost and time. In a procurement transition strategy that is so heavily dependent on external supplier competency and adaptability, risk mitigation will involve external partners. Heyes (1992) asserts that not all suppliers have a culture of cooperation and inclusion that emphasises teamwork. Some suppliers are highly bureaucratic and resistant to establishing cooperative alliances with partners and customers. Hence, in such a scenario, a substantial risk to the project would be the willingness of suppliers to adapt to a communities of practice or rapid prototyping model for supply changes in a method that is effective for meeting the business’ vendor needs. Risk mitigation strategies, in this scenario, could include managers making contingency plans to select a more diverse supplier network or perhaps using executive and legal authority to threaten contract renegotiation or termination to incentivise supplier collaboration. Developing a relationship marketing strategy as a risk mitigation idea to build trust between customer and suppliers could also be a focus whereby cooperation and collaboration can be established with upstream vendors (Kleijnen and Smits 2003). Not all potential risks and uncertainties for a project can be measured quantitatively, and in the case of procurement and expectations for a supplier to be more flexible and responsive, risks must be measured qualitatively (Lekatis 2014). Risk managers involved in controlling risks in the procurement project must be considerate of change resistance or other socio-psychological factors that could impact supplier flexibility and capability to adapt to changing procurement needs. However, how do these non-statistical risks come to be identified appropriately? Korombel and Tworek (2009) suggest utilising the Delphi method, an approach whereby members of the organisation itself and external experts critical to success of a project’s objectives meet formally or informally to discuss solutions and concerns about certain change activities. In a more informal environment, actual sentiment and opinion from external suppliers can provide valuable information for the risk manager about non-quantitative concerns that could impact success of the lean procurement transition project. External members in supply networks have intimate knowledge of the cultures of their organisations, the productivity capability of their own workers, and the management systems that either promote collaboration or maintain a closed system of leadership. The Delphi system provides all members of group sessions with a questionnaire that predicts the likelihood of success or failure of a specific phenomenon (Frame 2003). Not all risks in the procurement transition project can be treated or prevented using statistical matrices or other quantitative data, such as that involving cost, time and productivity measurements. The basic, heuristic method known as brainstorming can also allow important members of the project team (or other internal talents) to express their own ideas, concerns or solutions to identified threats to achieving objectives (Korombel and Tworek). For instance, involving the Human Resources Manager in the procurement project might identify their own personal experiences with change resistance or certain organisational members’ adaptability and how to incentivise compliance more effectively. Operational managers and executive members lack this knowledge and experience of qualitative factors that could impede the procurement transition project. An open and non-judgmental set of brainstorming activities allow for problems to be defined, where the problem lies, and how it might be effectively controlled and otherwise mitigated. In this hypothetical lean procurement transition project, if there is high probability that an event will occur with a critical impact on the project, transferring risk is an opportunity. For example, if the project maintains a short deadline, quality issues could be substantial until the business has adjusted to operations (over a period of time) under a lean ideology. Executive managers can be recruited to conduct risk analyses of changing insurance companies and contracts and how quality-related liabilities can be offset with insurance policies and changed insurance coverage. The finished product, when sustained with a lean procurement methodology, may not fully achieve quality standards expected by the customer. The business, when supplemented by a future Total Quality Management implementation project, may cover these factors once the lean system is tested and implemented. Therefore, quality liabilities could be substantial in the short term. By having executive talent explore how to transfer risk to a third party, the project can achieve its deadline for completion. Furthermore, based on quantitative data gleaned from the probability and impact matrix, high risk probabilities should be given top priority to ensure avoidance and mitigation. Managers with experience in conducting statistical analyses (i.e. Pareto Charts, histograms, and statistical process control) should be recruited to provide recommendations related to expected productivity declines or cost issues associated with a new procurement strategy. Statistical measurements and using probabilities to eliminate variability enhances discovery in the organisation associated with risk (Aven 2008). In the banking sector, Pareto Analysis has been found to be a substantially-viable statistical analysis to reduce risks in credit processing models (Stoiljkovic, Milosavljevic and Randjelovic 2010). Not all lean procurement transition team members will have the capabilities to construct numerical representations of probabilities and other statistical data, hence recruitment of these talent professionals will be critical to understand productivity risks and manufacturing risks of a leaner inventory system. Finally, the project manager should recruit the most experienced and capable project team members to report on potential contingencies in the event that a probable risk occurs during the project. Contingency theory states that as circumstances internally or externally change, the organisation must also adapt if it is to remain relevant (Buchanan and Huczynski 2010). The project manager, alone, is not equipped with complete knowledge of all inter-dependent business divisions that would be involved in a scenario where procurement and inventorying methodologies have changed radically. Non-probabilistic decision theory indicates that when there is a risk scenario identified, managers should select an alternative that maintains the least unfavourable outcome. In the lean procurement transition project, this could involve divestiture of massive warehousing facilities, purchasing more modern production technologies, or simply altering manufacturing procedure to be aligned with more efficient just-in-time inventories. Having tacit knowledge experts throughout the organisation come up with and present contingencies can ensure that decisions to mitigate risk can be made with minimal regret value. Conclusion As illustrated, there is a blend of qualitative and quantitative hazards or threats that could complicate successful implementation of a lean procurement transition project. Risk managers must utilise all methods available that identify a substantial volume of probable risks, determine the threat level and potential impact on the business if the hazard actually occurs, and then prioritise risk mitigation strategies based on the degree to which the threat or hazard maintains as an implication on the business or the project. In a lean procurement transition project, there is a blend of socio-psychological risks to success in the project, cost-related success, potential liabilities for altering production, and multiple probabilities of supplier-related difficulties. Hence, risk management in such a project is the responsibility of virtually everyone in the organisation and risk is mitigated by determining the probability of a risk event and placing priority on the most critical threats. 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