Risk and Risk

Management

Risk can be defined as the chance of deviation

from planned outcome resulting in loss due to
occurrence of an event or events
Present in all business activities or even ordinary
activities of life
The probability of risk is measurable
appropriate action can be taken to minimize

and

Uncertainty is not measurable so no preventive

measure possible

Employee risks
Compliance risks
Operational risk
Market risk, foreign exchange risk
Financial risks
Credit and interest rate risk
Health and safety risks
Political and Economic Risk

Risks can be classified as

Idiosyncratic risks (unsystematic) that usually
affect only individual firms (e.g key managers
quitting, fire damage)
Covariate risks (systematic) that affect many
enterprises simultaneously (e.g., major droughts
or 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 dishonesty
of an employee; incompetence of the manager or other
important people in the organisation, etc.
Also, failure of suppliers to supply the materials or goods
on time or default in payment by debtors may adversely
affect the business enterprise
Physical factors are the factors which result in loss or
damage to the property of the firm. They include the
failure of machinery and equipment used in business; fire
or theft in the industry; damages in transit of goods, etc.

External Risks
Economic factors are the most important causes of
external risks. They result from the changes in the
prevailing market conditions.

price fluctuations,
changes in tastes and preferences
inflationary tendency in the economy,
fluctuations in world economy
Govt. Policy changes
Exchange Rates (Depreciation or appreciation of
currency)

Natural factors are the unforeseen natural

calamities over which an entrepreneur has very
little or no control. They result from events like
earthquake, flood, famine, cyclone, lightening,
tornado, etc. Such events may cause loss of life
and property to the firm or they may spoil its
goods.
Political factors have an important influence on
the functioning of a business, both in the long and
short term. They result from political changes in a
country like fall or change in the Government,
communal violence or riots in the country, civil war
as well as hostilities with the neighbouring
countries.

Risk Management
Risk Management is a process of thinking
systematically about all possible risks, problems
before they happen and setting up procedures that
will avoid the risk or minimize its impact or cope
with its impact if it happens
It is basically a process where you can identify the
risk and set up a strategy to control or deal with it.
the systematic way of ensuring protection of
business resources and income against losses so
that the aim, goals and vision of the company can
be reached

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)

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
11

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

12

Supply chain analyses can be carried out at different

levels of analysis including the
Dyadic level: The two-party relationship, such as
between input supplier producer, producer and buyer,
producer and financial institution
Sub-chain level: A set of dyadic relationships, such as
input supplier and producer, and buyer
Chain or network level: The entire supply chain and
network 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

15

Supply chain A network of interrelated entities their

facilities, functions and activities which are involved
in Procurement, Conversion and Delivery of Goods.
Primary purpose of supply chain is to satisfy the
customer needs
Sequence begins with the raw materials and
extends all the way to the final consumer.
Facilities include : warehouses, factories, processing
centres, distribution centres, retail outlets
Functions and activities : Forecasting, purchasing,
scheduling,
inventory
management,
quality
assurance, delivery, customer service
16

Supply chain
Supplier

Manufacturer

Distributor

Retailer

Customer

Supplier

Manufacturer

Distributor

Retailer

Customer

Supplier

Manufacturer

Distributor

Retailer

Customer

Upstream

Downstream

It is dynamic with constant flow of

information, goods and funds
SCM is a process of planning and
controlling the efficient, effective flow of
goods, services and related information
from the point of origin to the point of
consumption

18

 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

20

Flows in a supply chain

Information
Goods/Product

Customer

Producer
Cash/Money

Supply Chain

The objective : Providing the maximum

value to the customer at low cost
Efficiency : The Basis of Management
Efficiency leads to lower costs
Lower cost implies
Lower Price
Greater demand
market growth
Higher profits
market share

Better
Better

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

Bull whip Effect

Each organisation seek to solve the problem
from its own perspective
Small changes in consumer demand result
in large variations in orders placed
upstream
Dramatic order size variation
Amplification of order size variation as one
moves up the supply chain

24

25

Causes
Little or no communication between supply
chain 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 can
strategically collaborate with their supply
chain partners and collaboratively manage
the intra- and inter-organization processes
to achieve the effective and efficient flows of
Product and services
Information
Money
With the objective of providing the maximum
value to the customer at low cost and high
speed

Competitive Strategy and Supply Chain Strategy

of the Firm Have the Same Goal.
The Customer Priorities the Company Strategy
Hopes to Satisfy and the Supply Chain
Capabilities that the Company Strategies aims to
Build

28

Fundamentals of SCM
Single entity
Planning and control with single entity
(purchase, manufacturing and marketing team)
Systems Approach
The supply chain from vendor to customer is viewed as a
single integrated system rather than many subsystems
with interface with each other
Inventory Perspective
Inventory to be used as a buffer of last resort
Less inventory by reduced lead time
More flexibility
Reduce uncertainty
Improve quality

29

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

30

Physically Efficient Vs Market Response Supply

Chains
Supply chain effectiveness with base
characteristics of the market in which it is operating
If product and technology is stableprice
competitiveness in terms of cost control on supply
chain
If market characteristics are dynamicnon price
characteristics supply chain responsiveness
31

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, flexibility

and quality

Product-design
strategy

Maximise performance and

minimize cost

Use modular design in order to

postpone product differentiation for
as long as possible
32

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 quality

Reducing inventory and wastage
Minimising Variety
Standardize products and offerings
Managing Demand
Meeting unanticipated demand flexibility of
supply chain
Delaying differentiation
Till final consumption point do not assemble
34

Kitting of suppliers
All components needed for assembly supplied at
one stage
Focus on A category
Large value or critical components get special
attention
Planning for multiple supply chains
Different supply for different consumer segments
Modifying performance measure
Utilisation of space in the warehouse versus time
needed for retrieval
35

Competing on service using SCM

Service delivery for long term competitive
advantage
Products and quality only short term
advantage
Moving from function to processes
Taking initiative at the industrial level
Consortium approach
36

In the end, all business comes down to

Supply Chain vs. Supply Chain
Robert Rodin, CEO, Marshall Industries

37

38