Risk Management Decisions - Case Study Example

Introduction Risk management is fairly regarded as one of the fundamental elements of the successful human performance. In business or non-profit organizations, in emergency situations or critical procedures, risk management works to help individuals and organizations to identify and assess risks and develop risk mitigation procedures. Even daily operations and household chores require having a clear sense of possible risks and the ways of reducing them. A risk management cycle incorporates a series of actions and decisions. Generally, a common risk management cycle comprises several essential stages/ decisions: risk identification, risk measurement, risk analysis, risk decision, implementing, monitoring, and policymaking. All these decisions and actions have their benefits and costs but altogether, they create a holistic picture of the risks and possible failures and help to reduce the probability of even the most unpredictable business and individual complexities. On the example of product recall, key points of risk management decisions making is presented further on. Key risk management decisions No one can predict the future. Nevertheless, the ability to predict, anticipate, and mitigate the risks is of vital importance in all areas of individual and business performance. No one has ever succeeded to predict the changes in a stock market or exchange rates, but even the most complex risks that arise from uncertainty can be successfully managed (Crouchy & Mark 2006). The definitions of risk management are numerous and varied. However, it is possible to assume that risk management is a complex combination of actions and decisions, aimed to identify and measure risks, anticipate its consequences and take actions to transfer or mitigate such risks (Crouchy & Mark 2006). Generally, a risk management cycle incorporates a variety of actions and decisions, the sequence of which organizations and individuals pursue in their striving to reduce risks. Everything begins with risk identification, continues through risk measurement, analysis, and decision, and ends with implementing, monitoring, and policymaking. The following picture perfectly depicts this important chain of activities: Figure 1. Risk management cycle Needless to say, each step and decision within the risk management cycle is associated with a number of benefits and costs, of which individuals and individuals must be aware, to utilize their risk management resources more effectively. The second diagram provides a step-by-step risk management decision making. On the example of product recall, a process requiring huge costs, moral and financial losses from the company, risk management decisions are analyzed. A product recall can be defined in the following way: “it is a request to return to the maker a batch or an entire production run of a product, usually due to the discovery of safety issues” (Product Recall Definition). Thus the process of risk identification is based on risk types categorization and strategies development needed to mitigate them (Flanagan & Norman 1993). At the risk identification stage, the sources of risks must be clearly defined (Flanagan & Norman 1993). Consequently, risk identification of product recall emerges on the initial stages of product development and in the process of exploitation. Risk identification provides the company with unique information about product recall occurrence in the future. Moreover, it is clearly understood that “there are three ways of classifying risk: by identifying the consequence, type and impact of risk” (Flanagan & Norman 1993). The example of product recall perfectly fits as the example for this stage: in case risk of product recall was not introduced, injures and damages would emerge. Risk identification decisions are usually followed by the processes of risk measurement. Risk measurement is the process by which companies and individuals measure the risks which they face and evaluate their effects/ consequences (Priddy 2010). Risk measurement in product recall is performed on the basis of recorded data about product. Risk measurement of product recall should be conducted with regard to federal agencies that reconsider recalls. If these conditions were performed then risk would be prevented or facilitated. Risk measurement is necessarily followed by risk assessment. The latter utilizes the results of the preceding risk measurement to evaluate the seriousness of each risk, its potential effects on business decisions and develop strategies to mitigate these risks. For example, risk assessment of product recall implies scrutinized analysis of customers’ complaints, reports about nonconformity of quality etc. Basically, risk assessment is performed in the process of a proper analysis of the abovementioned documents. The implementation of risk management decisions and monitoring their progress/ effects are not easy tasks. The process of implementing risk management decisions and frameworks requires that organizations and individuals (a) define and maintain an appropriate timing; (b) apply all aspects of the risk management policies and processes to organizational decisions and tasks; and (c) pursue regulatory and legal compliance (ISO 2008). For example, product recall effectiveness can be protected in in-time risk management implementation decisions: customers’ informing about product recall, instant product recall performance. In this case health hazards, damages and even company’s reputation loss can be facilitated. Monitoring and policy decisions are the two ultimate stages of the risk management decision-making cycle. Thus Recall Coordinator should properly organize recall team and repot to the senior manager about every stage of product recall. In this case successful risk management decisions could save or restore company’s reputation in the market. It is also possible to trace costs/benefits in the process of product recall causing impact on the organization and customers. Impact Levels Benefits Costs/Problems Possible Risk Management Strategy For the organization Potential perspective of product recall decrease Economic losses and increased workload for employees/recall group/managers Active cooperation of recall group and consolidation of economic and human resources of organization For the customers Health hazards and potential damages decrease Return of unqualified products requires extra time and displeases customers A possibility to receive a compensation or a new product instead of an unqualified one Direct and indirect costs/benefits of risk management decisions Direct and indirect costs of risk management decision will be considered on the example of product recall risk management. This example was chosen because of its wide-spread occurrence among different companies. Product recall problem may concern manufacturers, assemblers, whole sellers or retailers of products. After recall plan has been developed, risk management decisions involve direct and indirect costs. For example, direct costs of risk management decisions may include wages for staff engaged in recall plan. Moreover, in order to discard an image of the company providing their customers with bad quality products, it will be necessary to purchase air time on TV, for example (Product Recall). Indirect costs include lost production time, because staff has to rush into recall plan performance and neglect the process of obligatory production. Moreover, it is possible to hire other employees in order not to lose obligatory production process. The most intimidating indirect cost is a loss of customer’s trust that may lead to decrease of company’s share price in the market. Basically, all risk management decisions are associated with numerous direct and indirect costs. Such costs are an inevitable product of the risk management cycle in any organization. T Risk identification is closely connected with prevention stage. At this stage a profound analysis during product design requires additional direct costs spent on “quality assurance, product serialization and traceability, complaint management, inventory control, customer education, etc” but it would essentially decrease hazards (Product Recall). The risk identification stage or preparation stage of product recall may include direct costs of contingency plan preparation and appointing a Recall Coordinator (Product Recall). Wrong categorization leads to the failure of the risk management initiatives – this is the most serious direct cost of the risk management decision. Therefore direct benefits of risk identification creates a foundation for the subsequent measurement and evaluation of risks because it provides the company with relevant information for further direction of product recall and risk decisions making. Risk measurement decisions are also associated with a number of direct costs. Documentation and recording of the product life/marking/serialization requires time and skills of staff. Nevertheless risk measurement would be performed on the basis of exact and reliable data thus facilitating the process of risk measurement. Moreover, the effectiveness of the recall should be properly measured in compliance with federal agencies that reconsider recalls. Thus direct benefits of risk measurement are the following: first it helps to define whether risk management policies and procedures help companies to meet their safety goals and a correct risk measurement of product recall would assess and predict the profitability and safety of the company as well as predict the scope of possible losses and avoid them (Priddy 2010). Risk measurement has indirect benefits: it creates a basis for comparative risk studies of companies where product recall can emerge. Risk assessment requires different record sources on potential product hazards, for example, such kind of documents as “customer complaints, warranty claims, test and inspection records, repair and service records, and product liability claims” (Product Recall). Direct costs occur at this stage. Imagine that each record has to be evaluated and similarities of different complaints should be found (Product Recall). Consequently, risk assessment has direct and indirect benefits: first, risk assessment contributes to the awareness of risks and hazards (CCOHS 2010). Second, risk assessment works to identify who is at risk (CCOHS 2010). Third, risk assessment aims at and helps to identify the appropriateness of the existing risk management procedures (CCOHS 2010). Ultimately, it is due to risk assessment that individuals and businesses can “prevent injuries or illnesses when done at the design or planning stage and prioritize hazards and control measures” (CCOHS 2010). Risk management implementation decisions can safe costs of the company in case product hazard identification is immediate and a recall is implemented. “Time” is indirect cost. This category implies informing customers as soon as possible about product recall. Once the evaluation and investigation have been completed and a product hazard has been identified and confirmed, the company has to be decisive and implement a recall. In such a way, injures and damages would be reduced. Thus direct and indirect benefits of the risk management decision is in that (a) it identifies current and future course of action and (b) helps to estimate the greatest benefits and the smallest costs of each particular decision. The benefits of the risk management implementation decisions are obvious: they are starting points for long-term risk management policies and procedures development. For example, current process of product recall could be prevented in the future in case different reasons for product recall are properly evaluated. In the context of monitoring and policy decisions, recall team should be well-organized and work effectively under the guidance of a Recall Coordinator. The latter is subjected to senior management. Monitoring and policy requires additional direct costs (wages for recall team, Recall Coordinator and extra-time spent by senior manager) and indirect costs such as time, expertise, professionalism etc. In terms of monitoring and policy changes, there are direct and indirect benefits. For example, a successful risk management of product recall would create risk preventive strategies for the like companies. Moreover, the company would benefit from successful performance of monitoring and policy and widen horizon of potential risk preventive actions. Conclusion On the basis of product recall, risk management decisions were considered in detail. In the result of this study it can be concluded that risk management is the most important sphere for every company. Having followed a risk management cycle, the company has to take different kind of actions and decisions in order to reduce risks of product recall. Everything begins with risk identification, continues through risk measurement, analysis, and decision, and ends with implementing, monitoring, and policymaking. Risk management cycle is a well-developed strategic chain of actions. Consequently, each of these actions has direct and indirect benefits and costs. Direct costs/benefits concern the company and have impact on its infrastructure, performance etc. Indirect costs/benefits exert influence on companies-partners or companies working in the same sphere. In order to reduce risk of product recall or facilitate a process of product recall performance, it is necessary for recall team, Recall Coordinator and senior manager to follow stages of risk management cycle. Product recall is a complicated process for any company and any company can be stricken by it. Nevertheless in case of a well-coordinated work of risk managers, product recall may cause no damages and the company may have no negative influence on its reputation. References Alff, GN 1991, ‘Estimating loss reserves using an actuarial report’, Risk Management, April, [online], accessed from http://findarticles.com/p/articles/mi_qa5332/is_n4_v38/ai_n28601239/ Anonymous 2005, ‘Section IV: Risk monitoring and risk management’, Containing Systemic Risk: The Road to Reform, [online], accessed from http://www.crmpolicygroup.org/docs/CRMPG-III-Sec-IV.pdf CCOHS 2010, ‘Risk assessment’, Canadian Centre for Occupational Health and Safety, [online], accessed from http://www.ccohs.ca/oshanswers/hsprograms/risk_assessment.html Crouchy, M & Mark, R 2006, The essentials of risk management, McGraw-Hill Professional. Flanagan, R & Norman, G 1993, Risk management and construction, Wiley-Blackwell. ISO 2008, ‘Risk management – principles and guidelines on implementation’, International Organization for Standardization, [online], accessed from http://rmia.org.au/LinkClick.aspx?fileticket=AWkZuS%2BB6Wc%3D&tabid=85&mid=634 Priddy, BD 2010, ‘Business risk measurement methods’, EHow.com, [online], accessed from http://www.ehow.com/about_5423111_business-risk-measurement-methods.html Product Recall Risk Management. [online], accessed from http://www.thehartford.com/corporate/losscontrol/CFLC/20recall.pdf Risk Management Cycle. [online], accessed from http://www.wbdg.org/images/ riskmanage_3.gif Product Recall Definition. [online], accessed from http://en.wikipedia.org/wiki/Product_recall Read More