Risk Management in Duraseat Ltd - Case Study Example

RISK AND VALUE CHAIN MANAGEMENT Name Professor (Tutor) University Course City and State Date Risk and Value Chain Management Risks are uncertainties when performing a transaction. The uncertainties involving risks can be of either success or failure. Besides, a risk can be addressed as a probability since the outcome is unknown (Embrechts et al., 2002). Risks can be classified as internal or external. External risks are those that cannot be controlled by an organization while internal risks are those that can be easily controlled by the company (Burtonshow-Gunn, 2009). Risk management is the minimization and control of the effects of risks through identifying and assessing the risks then putting in resources to deal with it (Leland, 1998). All risks whether internal or external need control and managing to ensure quality production of goods and service for customer satisfaction (Basak & Shapiro, 2001). Value chain management can be defined as the process of planning a group of activities that are effective in value creation through the production of goods and services from cheaper resources and raw materials (New & Westbrook, 2013). The primary aim of value chain management is to increase customer satisfaction by increasing cooperation and communication levels (Petrash, 1996). Risk and value chain management is essential for all organizations. Value chain management is critical to ensuring that risks are managed effectively. Customer satisfaction is important for many organizations and therefore an organization that effectively manages its risks and value chain often achieves its objectives (Kay, 2013). Through identification and acknowledgment of the risks, businesspeople can learn from others who have experienced the same challenges, look for solutions, and proceed with their expansion strategies with confidence (Chopra & Sodhi, 2004).Risk assessment and value chain management of Duraseat Limited is explained bellow. Duraseat Limited Duraseat Ltd has been affected by risks because of natural causes which are the heavy rain. Some of the risks that can be assessed from the case of Duraseat Ltd include: Political risk The political risk the company encounters in this situation is the pressure it gets from the local administration and planning authorities to relocate. However, these institutions are not able to enforce the relocation process through the planning laws that exist. The planning laws provide Duraseat Ltd with immunity. Economic risk In the past two years, the level of competition offered by suppliers from suppliers from Asia and Eastern Europe has set the company to failure, as it has not been able to achieve its annual targets. The value of an investment that the company has made is high, and management fears that they risk losing shareholders if the trend continues. Legal risk An explosion at the company's plant in addition to the heavy rains led to the spread of toxic fumes to the residential areas around the company and the fishing village. Health effects of the toxic fumes include an increase in respiratory diseases to the people living around and this has led to the company to face serious legal consequences. The legal action and consequences are from interest groups such as human rights groups and other organizations or institutions like the planning authorities and the local administration. Social risk The social risk the company faces is from some of the locals on the existence of the company in the location as it causes health issues to the locals by polluting the environment. However, some of the locals are intolerant to the company, as it has provided employment to more than 300 people from the local community. This issue ensures that the social risk the company faces regarding locals wanting the company to relocate is reduced. Technological risk The use of technology in conducting the company’s activities has been minimal as the process of transportation and production is not reported to employ any expensive and advanced technologies. In the area that the company is located, the case study does not inform if there is any technological infrastructure. The technological risk comes in as companies that employ the use of advanced technologies can gain a competitive edge over Duraseat Ltd. Environmental risk The environmental risk the company faces is associated with the heavy rains the area it is located faces. The site has flooded because of the overflowing of a nearby river. The heavy rain is a major obstacle as it causes leaks in the chemical storage tanks. Another environmental risk is the pollution to the environment caused by explosions that spread toxic fumes to the atmosphere as in the 2015 case. Competitive risk Increased competition from suppliers from Asia and Eastern Europe has led to the company to fail in meeting its set objectives and targets. The company risks dropping its competitive advantage in the plastic chair and table market if it does not change its strategies. Risk assessment register. The table below shows the risk assessment register for Duraseat Ltd. Risk Aspect Potential Effect Solution Possibility Political risk The pressure of relocation to another area. Use the immunity offered by the planning laws. Planning laws ensure that the political risk is mitigated Economic Risk Inability to achieve the set targets and objectives over a period of two years. Cost effectiveness and management of sales. Managing of sales and forming effective strategies will reduce the economic risk. Social Risk Unacceptability by the locals. Create more job opportunities for more locals. Reduced social risk Legal Risk Legal action from human rights groups and other interested organizations. Following the correct legal steps and solutions to ensure the company is immune to relocation. Reduced legal risk Environmental Risk Poor weather conditions caused by heavy rains and release of toxic substances into the atmosphere. Constructing proper drainage systems on the site and putting in measures to ensure explosions are not a regular occurrence. Reduced environmental risk Competitive Risk Competitors for example suppliers from Eastern Europe and Asia. Ensure formulation of proper strategies to ensure that the company regains its competitive advantage. Reduced competitive risk even with the rise in levels of competition. Technological Risk Inadequate use of technology in the production process. Incorporate advanced technology in the process of manufacturing and production. Reduced technological risk as advanced technologies ensures effective and efficient production. Quantitative analysis involves analyzing identified risks numerically and establishing their effects on overall project objectives (Burtonshow-Gunn, 2009). The main aim of performing the quantitative analysis is that it aids in reducing project uncertainty through the production of important risk information (Godfrey et al., 2009). The process of quantitative analysis is performed based on the criteria below: First, the probability of occurrence of the risk, frequency of occurrence of the risk and the severity of the risk, and the total is to determine its impact on the environment. The probability of occurrence is measured from 1 to 5 with 1 - Being zero probability, 2 – rare, 3 – probable, 4 – likely and 5 – certain. The frequency of occurrence takes the same parameters. (1- Rarely, 2 – irregular, 3 – often, 4 – very often, 5 - continuously). Severity parameters: (1- harmless, 2 - minimum, 3 – moderate, 4- severe, 5 – very severe) (Stulz, 1996). The table below shows Duraseat Ltd quantitative analysis: Aspects Probability Frequency Severity Total Environmental Risk 4 4 4 12 Social Risk 3 2 4 9 Legal Risk 3 1 4 8 Political Risk 2 2 2 6 Technological Risk 2 3 3 9 Competitive Risk 2 3 3 8 Economic risk 4 3 5 12 Environmental and economic risks have the most severe impacts on the environment as seen from the table and the company should, therefore, give them priority when dealing with the risks. The criteria used for determining the risks that will have risk response plan is simply based on the impact of the risk on the expansion plan and the likelihood of the risk occurring (Rasmussen, 1997). Each of the major risks will be assigned to a risk owner for control and monitoring. After careful assessment of the risks, Duraseat Ltd faces the risks are classified as shown in the table below on the risk response plan. Avoid Mitigate Accept Contingency Transfer Environmental risk Competitive risk Economic risk Legal risk Political risks Social risk Technological risk Disaster Recovery Plan The functionality of the company is set to be affected by certain hazards that may lead to disaster. The hazards the company might face can be technological or environmental. Environmental Hazards The company deals with manufacture and production of plastic chairs and tables, which involves the use of dangerous chemicals. Heavy rains are often witnessed in the area where the company is located, this causes an overflow in the river nearby leading to chemical leaks in the water, and this is dangerous to both aquatic life and residents. The company should consult local authorities and the government to aid in constructing a dam in the area that will deal with the overflowing river Change during heavy rain periods. The dams could be used to serve the people for domestic use and irrigational purposes. Water treatment plants could also be established to deal with the issue of water pollution. The release of toxic fumes to the atmosphere due to the explosion as it was experienced in 2006 is the other environmental hazard the company produces. These toxic fumes are a concern as it causes health complications for residents. To mitigate the occurrence of the explosion in the future safety checks are important once every week where valves and other connectors are checked for tightness. Another way of dealing with the issue is ensuring that those affected by pollution by the company are compensated through insurance. Technological hazards One of the technological hazards the company faces is the use of road and railway in the transport of products and raw materials. The raw materials used are dangerous chemicals, and the transport mode will often lead to danger in case of leakages or accidents. The company should incorporate the advanced pipeline technology as a contingency plan to deal with the issue. Storage of chemicals used in plastic boiling in tanks is another technological issue that the company faces. Tanks are poor in the storage of chemicals as leakages are common and this poses a danger to both the employees and the locals. Advanced underground tanks should be used to store the chemicals used in the production process to minimize leakages. Value Chain Analysis The value chain is the functions and activities that a firm performs for the purposes of delivering valuable products and services to the market, which in this case are the customers (Emmett, 2013). It is dependent on the process of manufacturing organization as a system that is based on the inputs to the company and the output, which are the profit returns from the sale of the products. The first phase of value chain analysis is inbound logistics, which entails distribution, receiving and warehousing of raw materials (Cook, 2011). In the case of Duraseat Ltd., the raw materials that are plastic and chemicals used in the production process are distributed by use of rad and railway and warehousing is done by storing these raw materials in special storage units until the time they will be needed for use. The second phase of value chain analysis is operations (Heskett et al., 2012). Operations in Duraseat Ltd are both service and product oriented. Operations are the transformation of raw materials or inputs into the final products. The stored raw materials including used plastic and the chemicals are used to manufacture plastic tables and chairs. The outbound supply chain also is known as outbound logistics in the value chain has the sole purpose of delivery of goods and services to the consumer (Simchi-Levi et al., 2014). The manufactured chairs and tables are then distributed across schools (customer) in Europe. Marketing and sales are the downstream aspects of value chain supply (Taylor, 2011). Advertisements are an important tool that the company can employ in marketing its products, and this will ultimately improve the value of the goods and products. Loss of value in the marketing is a disadvantage that can be caused by the sophistication of customers and their general awareness of the business practice. Taking this as an advantage the company can provide customers with many recycling points and provide this information in their advertisements. Conclusion In conclusion, risk management is an important aspect of organizational expansion to other unknown markets and new business set-ups. Risk management process is nonstop and forward-looking since every business organization looks forward to growth. Also, its objectives and goals create a motivation for the companies to recognize and deal with potential issues before them happening (Thiry, 20020. Value chain analysis is also a critical part of the functionality of an organization. Value chain analysis improves the quality of goods and services an organization produces thereby maintaining its competitive advantage. Certain important activities should be performed in value chain analysis to ensure effective management and development of organizations. References Basak, S. & Shapiro, A., 2001. Value-at-risk-based risk management: optimal policies and asset prices. Review of Financial Studies, 14, 2, pp.371-405. Chopra, S. & Sodhi, M.S., 2004. Managing risk to avoid supply-chain breakdown. MIT Sloan management review, 46, 1, pp.53. Burtonshow-Gunn, S. A., 2009. Risk and Financial Management in Construction. London, UK: Gower Publishing Ltd. Cook, T. A., 2011. Mastering purchasing management for inbound supply chains. 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