Risk and Risk Management

Risk can be defined as the chance of deviationfrom planned outcome resulting in loss due tooccurrence of an event or events

Present in all business activities or even ordinaryactivities of life

The probability of risk is measurable andappropriate action can be taken to minimize

Uncertainty is not measurable so no preventivemeasure possible

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Employee risksCompliance risksOperational riskMarket risk, foreign exchange risk

Financial risksCredit and interest rate riskHealth and safety risksPolitical and Economic Risk

Risks can be classified as

• Idiosyncratic risks (unsystematic) that usuallyaffect only individual firms (e.g key managersquitting, fire damage)

• Covariate risks (systematic) that affect manyenterprises simultaneously (e.g., major droughtsor floods, fluctuating market prices).

Internal Risks and External Risks

Internal Risks

Human factors are an important cause of internal risks.They may result from strikes; negligence and dishonestyof an employee; incompetence of the manager or otherimportant people in the organisation, etc.

Also, failure of suppliers to supply the materials or goodson time or default in payment by debtors may adverselyaffect the business enterprise

Physical factors are the factors which result in loss ordamage to the property of the firm. They include thefailure of machinery and equipment used in business; fireor theft in the industry; damages in transit of goods, etc.

External Risks

Economic factors are the most important causes ofexternal risks. They result from the changes in theprevailing market conditions.

price fluctuations,changes in tastes and preferencesinflationary tendency in the economy,fluctuations in world economyGovt. Policy changesExchange Rates (Depreciation or appreciation of

currency)

Natural factors are the unforeseen naturalcalamities over which an entrepreneur has verylittle or no control. They result from events likeearthquake, flood, famine, cyclone, lightening,tornado, etc. Such events may cause loss of lifeand property to the firm or they may spoil itsgoods.

Political factors have an important influence onthe functioning of a business, both in the long andshort term. They result from political changes in acountry like fall or change in the Government,communal violence or riots in the country, civil waras well as hostilities with the neighbouringcountries.

Risk ManagementRisk Management is a process of thinkingsystematically about all possible risks, problemsbefore they happen and setting up procedures thatwill avoid the risk or minimize its impact or copewith its impact if it happens

It is basically a process where you can identify therisk and set up a strategy to control or deal with it.

the systematic way of ensuring protection ofbusiness resources and income against losses sothat the aim, goals and vision of the company canbe reached

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Risk management is a process by which the most important risks can be identified, prioritized, and mitigated or eliminated.

Five stages

-- identify the risk.-- Measure the risk how big and how important or

critical and prioritize-- Strategies to eliminate or mitigate the risk -- Implement the strategies-- Monitor the strategies to find their

effectiveness and revision.

The steps in Risk Management process are:

Risk analysis- Risk identification & Risk evaluation(Risk measurement)(Risk quantification)

Risk control - Risk avoidance (improve systems and procedures) (Risk minimization)

Risk transfer- Insurance; Hedging in futures market

Risk financing- Risk retention (setting aside funds to cope with the situation)

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The treatment of the potential risks

the transfer of the risk— Persuasion of another party to accept the risk

Insurance, contracts etc

the exclusion (avoidance) of the risk

The probability of the risk is high and high frequency and cannot be transferred

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the reduction of the risk– Managerial, technological, and behavioural activity that lower the probability of the risk • better maintenance of machines,• several suppliers, work with suppliers• geographical spread of sourcing, • minimum counter party risks (minimum exposure

against default)

the acceptance (retention) of the risk or an amount of the risk

Risks that cause minimum loss or frequency is low

Properly budget for the losses

Supply chain analyses can be carried out at differentlevels of analysis including the

• Dyadic level: The two-party relationship, such asbetween input supplier producer, producer and buyer,producer and financial institution

• Sub-chain level: A set of dyadic relationships, such asinput supplier and producer, and buyer

• Chain or network level: The entire supply chain andnetwork of operations (backward and forward linkages,horizontal linkages)

Risk Management at OLAM

→Multiple Geographic area

→Variety of agricultural commodities

→Political risks, market risk, exchange rate risk and credit risk

→Presence in upstream plantation→Midstream Processing segments

→Board Risk Committee→Value at Risk (VaR)

Supply Chain Management

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Supply chain – A network of interrelated entities theirfacilities, functions and activities which are involvedin Procurement, Conversion and Delivery of Goods.

Primary purpose of supply chain is to satisfy thecustomer needs

Sequence begins with the raw materials andextends all the way to the final consumer.

Facilities include : warehouses, factories, processingcentres, distribution centres, retail outletsFunctions and activities : Forecasting, purchasing,scheduling, inventory management, qualityassurance, delivery, customer service

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Supply chain

Supplier Manufacturer Distributor Retailer Customer

Supplier Manufacturer Distributor Retailer Customer

Supplier Manufacturer Distributor Retailer Customer

Upstream Downstream

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It is dynamic with constant flow ofinformation, goods and funds

SCM is a process of planning andcontrolling the efficient, effective flow ofgoods, services and related informationfrom the point of origin to the point ofconsumption

• to have the right products in the right quantities (at the right place) at the right moment at minimal cost.

Improves Transactional Efficiency

By

Better quality control

Traceability

Less waste

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Flows in a supply chain

Customer

Information

Goods/Product

Cash/MoneyProducer

Supply Chain

The objective : Providing the maximumvalue to the customer at low cost

Efficiency : The Basis of Management

• Efficiency leads to lower costs

• Lower cost implies

Lower Price Greater demand Bettermarket growth Higher profits Bettermarket share

Uncertainties and conflicts in the supply chain

-- Each entity trying to maximize its profit

-- Each entity having a safety stock thus pushing up inventory cost ( working capital as well as cost of carry)

Leading to “Bullwhip Effect”

Cooperation among entities by sharing of information

Think as a single entity to minimize cost and uncertainty

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Bull whip Effect

Each organisation seek to solve the problem from its own perspective

Small changes in consumer demand resultin large variations in orders placedupstream

Dramatic order size variation

Amplification of order size variation as one moves up the supply chain

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Causes

• Little or no communication between supplychain partners.

• Delay times between order processing,demand, and receipt of products.

• Over reacting to the backlog orders.• Inaccurate demand forecasts.

Supply Chain Integration

• The degree to which the firm canstrategically collaborate with their supplychain partners and collaboratively managethe intra- and inter-organization processesto achieve the effective and efficient flows of

• Product and services• Information• Money

• With the objective of providing the maximumvalue to the customer at low cost and highspeed

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Competitive Strategy and Supply Chain Strategyof the Firm Have the Same Goal.

The Customer Priorities the Company StrategyHopes to Satisfy and the Supply ChainCapabilities that the Company Strategies aims toBuild

Fundamentals of SCM

Single entityPlanning and control with single entity

(purchase, manufacturing and marketing team)

Systems ApproachThe supply chain from vendor to customer is viewed as asingle integrated system rather than many subsystemswith interface with each other

Inventory PerspectiveInventory to be used as a buffer of last resort

Less inventory by reduced lead timeMore flexibilityReduce uncertaintyImprove quality

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Strategic Decision Making

Strategic implications rather than operational – building relationships to reduce cost

Doing what one can do best

Concentrate on activities one does best and outsource others

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Physically Efficient Vs Market Response Supply Chains

Supply chain effectiveness – with basecharacteristics of the market in which it is operating

If product and technology is stable—pricecompetitiveness in terms of cost control on supplychain

If market characteristics are dynamic—non pricecharacteristics – supply chain responsiveness

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Physically Efficient Process Market Responsive Process

Primary Purpose Supply predictable demand efficiently at the lowest possible cost

Respond quickly to unpredictable demand in order to minimize stockouts, forced markdowns and obsolete inventory

Manufacturing focus Maintain high average utilization rate

Deploy excess buffer capacity

Inventory Strategy Generate high returns and minimize inventory through out the chain

Deploy significant buffer stocks of parts or finished goods

Lead time Focus Shorten lead time as long as it does not increase cost

Invest aggressively in ways to reduce lead time

Approach to choosing suppliers

Select primarily for cost and quality

Select primarily for speed, flexibilityand quality

Product-design strategy

Maximise performance and minimize cost

Use modular design in order to postpone product differentiation for as long as possible

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Thrust Areas of SCM

Minimising uncertainty Vendor development and certification Sharing production planning information Joint attention to transport

Reducing Lead Times

Minimising the number of stages

The number of stages the goods goes through Improving flexibility Using flexible manufacturing and assembly

techniques 33

Improving process qualityReducing inventory and wastage

Minimising VarietyStandardize products and offerings

Managing DemandMeeting unanticipated demand – flexibility of supply chain

Delaying differentiationTill final consumption point do not assemble

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Kitting of suppliersAll components needed for assembly supplied atone stage

Focus on A categoryLarge value or critical components get special attention

Planning for multiple supply chainsDifferent supply for different consumer segments

Modifying performance measureUtilisation of space in the warehouse versus time needed for retrieval

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Competing on service using SCM

Service delivery for long term competitiveadvantage

Products and quality only short term advantage

Moving from function to processes

Taking initiative at the industrial levelConsortium approach

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In the end, all business comes down toSupply Chain vs. Supply Chain

Robert Rodin, CEO, Marshall Industries

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