SSRN Id1469678

OPERATIONAL RISK MANAGEMENT IN RICE BUSINESS UNIT BUSINESS PROCESS: CASE STUDY ON PT PERTANI (PERSERO)
FINAL PROJECT
By: Eric Tofano Bobian 19006042
Undergraduate Program School of Business and Management Institut Teknologi Bandung 2009
Electronic copy available at: http://ssrn.com/abstract=1469678
Electronic copy available at: http://ssrn.com/abstract=1469678
APPROVAL PAGE OPERATIONAL RISK MANAGEMENT IN RICE BUSINESS UNIT BUSINESS PROCESS: CASE STUDY ON PT PERTANI (PERSERO)
By Eric Tofano Bobian 19006042
A Final Project in Partial Fulfillment Of the Requirement for the Degree of Bachelor of Management Undergraduate Program of Management Study School of Business and Management Institut Teknologi Bandung August 2009 Approved By Supervisor
________________________________________ Dr. Ir. Sudarso Kaderi Wiryono
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ERIC TOFANO BOBIAN 19006042 Examination Date: 3rd August 2009 Graduation Date: 24th October 2009 Undergraduate Program, Bandung Institute of Technology Thesis Advisor: Dr. Ir. Sudarso Kaderi Wiryono ABSTRACT
The paper presents risk management process in a rice commodity company. Operational risk, as one of the oldest risk that already occurred in a business process for centuries is the main topic that will be discussed in the paper. Operational risk played important factor in the companys business processes. It is one of the biggest areas of risk that most companies face but it is an area, which has not traditionally been managed in an organized manner. If a company failed to identify and manage operational risks, it may result in huge financial losses that will lead the company to collapse. The writer chose PT Pertani (Persero) as research subject, because they are experiencing stable losses in their rice business unit for a long time. If the company keeps experiencing losses, they might declare bankruptcy in short period. In order to improve the companys performance, implementing operational risk management is crucial. Operational risk management included several steps, which are business process analysis, risk identification, risk measurement, and risk mitigation. Monte Carlo simulations are employed to approximate the loss distribution and probability distribution of each risk. Monte Carlo simulations make it possible to incorporate the uncertainty of valuation parameters, in particular the severity and probability of the risk event. The result of the research suggest that PT. Pertani (Persero) should implement operational risk management, because by implementing good operational risk management, the company could increase their overall performance by considering risks that followed each action the company take regarding operational processes. Hopefully this research will provided useful information for PT Pertani (Persero) to manage their operational risk.
Keywords: Operational Risk, Risk Management, Monte Carlo Simulation
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ERIC TOFANO BOBIAN 19006042 Examination Date: 3rd August 2009 Graduation Date: 24th October 2009 Undergraduate Program, Bandung Institute of Technology Thesis Advisor: Dr. Ir. Sudarso Kaderi Wiryono ABSTRAK
Penelitian ini membahas proses management resiko pada sebuah perusahaan di dalam bidang komoditas beras. Resiko operasional, sebagai salah satu resiko paling tua yang dapat terjadi di dalam proses bisnis selama beranad-abad, adalah topik utama yang akan dibahas dalam penelitian ini. Resiko operational mempunya peran yang sangat penting dalam proses bisnis perusahaan. Resiko Operational merupakan salah satu area resiko yang terbesar yang dihadapi perusahaan, namun selama ini umumnya tidak diatur dalam sikap terorganisir. Bila perusahan gagal untuk mengidentifikasi dan mengatur resiko-resiko operational, maka dapat mengakibatkan kerugian financial yang sangat besar yang dapat mengarah pada kehancuran perusahaan. Penulis memilih PT Pertani (Persero) sebagai subyek penelitian karena unit produksi beras dari perushaan ini selalu mengalami kerugian untuk waktu yang cukup lama. Bila perusahaan terus merugi, ada kemungkinan mereka akan mengalami kebangkrutan. Untuk memperbaiki kinerja perusahaan, implementasi manajemen resiko sangatlah penting. Manajemen resiko operasional terdiri dari beberap tahap, yaitu analisa proses bisnis, identifikasi resiko, pengukuran resiko, dan mitigasi resiko. Simulasi Monte Carlo akan digunakan untuk memperkirakan distribusi kerugian dan distribusi probabilitas dari setiap resiko. Simulasi Monte Carlo memungkinkan untuk memasukkan ketidakpastian dari parameter penaksira, khususnya pengaruh dan kemungkikan dari setiap kejadian resiko. Hasil penelitian menyimpulkan bahwa PT Pertani (Persero) sebaiknya mengimplementasikan manajemen resiko operasional, karena dengan mengimplementasikan manajement resiko operasional yang benar, perusahaan dapat menaikkan kinerja rata-rata dengan mempertimbangkan resiko-resiko yang disebabkan oleh setiap keputusan yang diambil oleh perusahaan yang berhubungan dengan proses operasional. Semoga penelitian ini dapat menyediakan informasi yang berguna bagi PT Pertani (Persero) untuk dapat mengatur resiko operasional perusahaan.
Kata kunci: Resiko Operasional, Manajemen Resiko, Simulasi Monte Carlo
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FOREWORD I am grateful to Allah SWT who has gives me such blessing to finish this final project that is required to attain the Bachelor Degree of Business and Management of Institute Teknologi Bandung. During the completion process of this final project I have had many support and help from many people. At this special chance the writer would like to give many thanks to: 1. Researchers beloved family, for the prayers and support in completing this final project. 2. Dr. Ir. Sudarso Kaderi Wiryono, as the Final project counselor, for his guidance, feedback, and continuous encouragement to complete this final project. 3. Mr Herry Hudrasyah, as the researchers Academic Counselor who has given guidance since the first year of researchers study in SBM. 4. Mr Asep from PT. Pertani (Persero) whom with his support in providing the data and other people from PT. Pertani (Persero) who I cannot mention one by one. 5. Researchers best friend for the past three years, Rachmadian Anindito, M. Syahdani, Bagus Aminullah, Tony Hartono, Wawan Darmawan 6. Putri Arinda, for being such a great friend, in every possible way, sometimes in a weird manner. that made me a better person. 7. All of my friends who are in the same counselor, Liani Amanda, Danuria Paramastri, Roby Rushandie, Aninda Sekar Putri, Muhamad Diandra, and Dian C. Anggara. 8. All of my friends who are choosing operational risk as their topic for final project, Rissabela Putri, Denis Satria, and Dimas Suryo for their support and assistance. 9. My entire SBM ITB 2009 family. Thank you for all the experiences. Thank you for all the support, encouragement, and many important lessons in life for the past three years
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10. And, other parties that help the researcher finish this research, whose name cannot be mentioned here.
I realize that this final project is still far from perfect. Thus, the writer would be very happy to receive any feedbacks and suggestions from all readers in order to give perfection of this final project. Hope that this final project can be useful as reference material.
Bandung, 28th July 2009 Researcher
Eric Tofano Bobian
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LIST OF CONTENT VALIDATION PAGE ...............................................................................................i ABSTRACT........................................................................................................... iii ABSTRAK ...............................................................................................................v FOREWORD .............................................................................................................vii LIST OF CONTENT..................................................................................................ix LIST OF FIGURES....................................................................................................xiii LIST OF TABLES .....................................................................................................xv CHAPTER 1: INTRODUCTION...........................................................................1 1.1 Background ....................................................................................................1 1.2 Main Problem.................................................................................................2 1.3 The Importance of Problem Solving ..............................................................3 1.4 Problem Limitation .......................................................................................3 1.5 Writing Systematic.........................................................................................4 CHAPTER 2: THEORITICAL FOUNDATION..................................................5 2.1 Definition of Risk...........................................................................................5 2.2 Operational Risk.............................................................................................6 2.3 Definition of Risk Management.....................................................................8 2.2.1 Risk Identification ..................................................................................11 2.2.2 Risk Measurement...................................................................................11 2.2.2.1 Monte Carlo Simulation ................................................................12 2.2.3 Risk Plotting............................................................................................14 2.2.4 Risk Mitigation........................................................................................16 2.2.4.1 Transfer Risk..................................................................................16 2.2.4.2 Control Risk ...................................................................................17 2.2.4.3 Retain Risk .....................................................................................17 2.2.4.4 Avoid Risk .....................................................................................17
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CHAPTER 3: RESEARCH METHODOLOGY .................................................. 19 3.1 Research Method ........................................................................................... 19 3.2 Research Steps explanation ........................................................................... 20 3.2.1 Problem Identification ............................................................................ 20 3.2.2 Research Objective ................................................................................. 21 3.2.3 Literature Study ...................................................................................... 21 3.2.4 Data Collection ....................................................................................... 21 3.2.5 Data Analysis.......................................................................................... 23 3.2.6 Risk Identification .................................................................................. 23 3.2.7 Risk Measurement .................................................................................. 24 3.2.8 Risk Mitigation ....................................................................................... 24 3.2.9 Conclusion and Recommendation .......................................................... 25 CHAPTER 4: DATA COLLECTION AND ANALYSIS .................................... 27 4.1 Analyzing the business of PT Pertani (Persero) ............................................ 27 4.1.1 Company History..................................................................................... 27 4.1.2 Companys Goals .................................................................................... 28 4.1.3 Companys Culture.................................................................................. 28 4.1.4 Corporate Organization ........................................................................... 28 4.1.5 Organization Structure............................................................................. 29 4.1.5.1 Board of Director ........................................................................... 29 4.1.5.2 Board of Commissioner ................................................................. 29 4.1.6 Management Information System .......................................................... 30 4.1.7 Company Business Process .................................................................... 31 4.1.7.1 Procurement Process ...................................................................... 31 4.1.7.2 Production Process ........................................................................ 32 4.1.7.3 Marketing Process ......................................................................... 33 4.2 Risk Analysis ................................................................................................ 34 4.2.1 Procurement Process ............................................................................... 34 4.2.2 Production Process ................................................................................. 34 4.2.3 Marketing Process .................................................................................. 35 4.3 Risk Measurement ........................................................................................ 37 4.3.1 Procurement Process ............................................................................... 38
4.3.1.1 People Risk ......................................................................................38 4.3.1.1.1 Data manipulation ..................................................................38 4.3.1.1.2 Fault in inputting data ............................................................40 4.3.1.2 Process Risk ..................................................................................42 4.3.1.2.1 Material substandard ..............................................................42 4.3.1.3 System Risk ....................................................................................47 4.3.1.231 System Breakdown ................................................................47 4.3.2 Production Process ................................................................................49 4.3.2.1 People Risk .....................................................................................49 4.3.2.1.1 Machine operator lack of skills ...............................................49 4.3.2.1.2 Workers health .......................................................................50 4.3.2.1.3 Workers discipline .................................................................54 4.3.2.2 Process Risk ...................................................................................56 4.3.2.2.1 Inventory data ...........................................................................56 4.3.2.2. Inventory damage risk ................................................................57 4.3.2.3 System Risk ....................................................................................61 4.3.2.3.1 Machine breakdown .................................................................61 4.3.3 Marketing Process .............................................................................65 4.3.3.1 Process Risk ................................................................................65 4.3.3.1.1 Distribution Risk ...................................................................65 4.3.4 Risk Summary ...................................................................................67 4.4 Risk Plotting ..................................................................................................68 4.5 Risk Mitigation ..............................................................................................69 4.5.1 Transfer ................................................................................................69 4.5.2 Avoid ....................................................................................................70 4.5.3 Control ..................................................................................................70 4.5.4 Retain ...................................................................................................72 CHAPTER 5: CONCLUSION AND RECOMMENDATION ............................73 5.1 Conclusion......................................................................................................73 5.2 Recommendation............................................................................................75 REFERENCES.........................................................................................................77
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LIST OF FIGURES
Figure 2.1 Operational Risk ................................................................................6 Figure 2.2 Risk Management Cycle ....................................................................9 Figure 2.3 Risk Management Process .................................................................10 Figure 2.4 Risk Simulation Distribution .............................................................13 Figure 2.5 Risk Plotting Matrix ..........................................................................15 Figure 2.6 Risk Mitigation Matrix ......................................................................16 Figure 3.1 Methodology ......................................................................................20 Figure 4.1 PT Pertani (Persero) Board of Director structure ..............................29 Figure 4.2 PT Pertani (Persero) Board of Commisioner structure ......................29 Figure 4.3 Management Information System ......................................................30 Figure 4.4 Procurement Process...........................................................................31 Figure 4.5 Production Process..............................................................................32 Figure 4.6 Marketing Process ..............................................................................33 Figure 4.7 Histogram of Material substandard risk for probability .....................41 Figure 4.8 Material substandard for probability classification ............................41 Figure 4.9 Histogram of Material substandard risk for severity ..........................45 Figure 4.10 Material substandard for severity classification ...............................46 Figure 4.11 Histogram of workers health risk for probability............................51 Figure 4.12 Workers health for probability classification ..................................52 Figure 4.13 Histogram of workers health risk for severity.................................53 Figure 4.14 workers health for severity classification........................................54 Figure 4.15 Histogram of inventory damage risk for probability ........................58 Figure 4.16 inventory damage risk for probability classification ........................59 Figure 4.17 Histogram of inventory damage risk for severity .............................60 Figure 4.18 Inventory damage for severity classification....................................60 Figure 4.19 Histogram of machine breakdown risk for probability.....................62 Figure 4.20 Machine breakdown risk for probability classification ....................62 Figure 4.21 Histogram of machine breakdown risk for severity .........................63 Figure 4.22 Machine breakdown risk for severity classification .........................64 Figure 4.23 PT Pertani (Persero) Risk Plotting Matrix........................................68
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LIST OF TABLES
Table 4.1 PT Pertani (Persero) Procurement process risk identification ............34 Table 4.2 PT Pertani (Persero) Production process risk identification ................34 Table 4.3 PT Pertani (Persero) Marketing process risk identification .................35 Table 4.4 PT Pertani (Persero) Risk Summary ....................................................67 Table 4.5 PT Pertani (Persero) Risk level............................................................68 Table 5.1 PT Pertani (Persero) Risk level summary ............................................73 Table 5.2 PT Pertani (Persero) Risk Mitigation Summary ..................................74
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CHAPTER 1 INTRODUCTION 1.1 Background People always face risks in every aspect of their life. Risks will always happen anytime, anywhere when we least expect it. It is important for us to be able to identify risks that we will face or there will be negative consequences that we have to accept. Companies, whether is it only a small scale companies or largescale companies, will not immune to the threat of risks that will affect their revenue. Risks form in many different types, which are market risk, operational risk, and credit risk. This paper will focus on operational risks that are faced in a company. Operational risk included system risk, internal risk, people risk, and external risk. It is important for a company to be able to manage and mitigate those risks well in order to minimize the effect. Rice is one of the most important commodities, especially in Indonesia. Almost all people in Indonesia eat rice as their basic food. Rice consumption in Indonesia reached 54.36%1, the highest compared with the other staple food, such as corn and wheat. PT. Pertani (Persero) is one of the state-owned companies that act as main suppliers of agriculture facilities that were established in 1959. PT. Pertani (Persero) produce many agricultural goods, such as organic fertilizer, rice seed and PT. Pertani (Persero) also involved in distribution of agricultural goods, especially rice. Those are the core business of PT. Pertani (Persero), but they also done other business activities, included distribution of pesticides and other chemicals for agricultural need (such as ZPT, PPC, Vaccine, Inoculum rhizobium), distribution of agricultural gears and equipment Trade of natural products (such as corns, soyabean, cashew), and PT. Pertani (Persero) also provide warehousing, transportation and cultivating service. As explained above, the production and distribution of rice is one of the core businesses of PT. Pertani (Persero). However, history showed that PT. Pertani
http://etd.library.ums.ac.id/gdl.php?mod=browse&op=read&id=jtptums-gdl-s1-2007-retnohanda9459&newlang=indonesian
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(Persero) always experienced a huge loss in this sector for a long time2. The competition from outside country that offer lower price with the same quality, or even higher quality is one of the main reason why PT. Pertani (Persero) cannot generate higher profit. Other reason why PT Pertani (Persero) is not able to generate profit from this sector is that because PT. Pertani (Persero) cannot manage and mitigate risks that may happen in the business process. The inability of the company to identify what are the risks in each business process lead to a fatal impact to the company. It is important for the company to be able to first identify those risks, and then take counter measures to manage and mitigate the risks so that the effect will be minimum and will give competitive advantage among competitors. 1.2 Main Problem Every business process in the company always faces risks that may impact the companys performance, whether in positive or negative way. History showed that the risk occur in the business process, especially in rice sector is always gave negative impact to the company, in terms of revenue. PT. Pertani (Persero) always and have been experienced huge loss in the rice sector start from when the company established. Therefore, it is important for the company to be able to identify what are the risks they face in the business process of rice production, especially the process risk, so that they are able to manage those risks in order to survive in the industry. At the time, PT. Pertani (Persero) have not implement risk management concept in their business activities, which means that the company ran their business and make strategic or daily decision without considering the risk that might occur3. Risk management could help the company to be able to identify those risks and take several actions to minimize it. It is important for the company to be able to manage those risk, because it could increase the performance of the company in the future by minimize the losses occurred due to the companys internal process.
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Statement from the manager and financial report 2005 -2007 Statement from the manager and organization structure
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1.3 The Importance of the Problem Solving By knowing what are the risks that might happen in the business process, PT Pertani (Persero) could forecast potential risks in the future and calculate the losses that the company may experiences, therefore PT Pertani (Persero) could take several steps to minimize the effect of the risk that will influences the performance of the company by mitigate and manage the risks, especially operational risk that happens in their business process. Eventually, PT Pertani (Persero) will be able to increase their performance, operationally and financially, which in the end could increase companys value. 1.4 Problem Limitation Due to the limitation of time, the scope of this paper will be focused on risk identification, risk measurement and risk mitigation in the rice business process in PT Pertani (Persero). The business process will be start from procurement The writer will use the process, production process, and distribution process.
historical data on the rice business process on year 2005 2007 period. The writer limited the research only on three operational risks, which are people risk, process risk, and system risk. The writer will not research and analyze external risk, because external risks are caused by external factors that are not directly related with the business process within the company.
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1.5 Writing Systematic Chapter 1: Introduction In this chapter, the writer will give brief explanation about the topic that will be discuss in order to help the reader to understand the main idea of the final dissertations topic. This chapter included the background why this paper made, why the writer chose PT Pertani (Persero) as research object. Chapter 2: Theoritical Foundation This chapter discuss about the basic theory that explain the entire concept that will be used in the paper. Literatures reviewed in this chapter used as references in for the formulas and theories. Chapter 3: Research Methodology This chapter will explain about the research method systematically from problem identification, data collection, data analysis and processing, and finally the conclusion from the research that the writer conducts. Chapter 4: Data Collection and Analysis In this chapter, the writer will give brief explanation on PT. Pertani (Persero), how the writer collect the data needed, and using the method and theory, the writer will try to analyze the operational risk of PT Pertani (Persero) in order to solve the problems within the company. Chapter 5: Conclusion and Suggestion This chapter the writer will give conclusion of the paper based on the previous analysis results. The writer will also try to give suggestion to the company based on the research and hoping that the suggestion will benefit the company in terms of increasing the companys performance, and in the end will increase the revenue of the PT. Pertani (Persero).
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CHAPTER 2 THEORITICAL FOUNDATION 2.1 Definition of Risk Human always faced with uncertainties in their activities, including their every day life activities. Risks can affect the outcome of an activity in both positive and negative way. Below are the definitions of risk: The probability of something happening that will have an adverse impact upon people, plant, equipment, financials, property or the environment and the severity of the impact (1999).4 From the definition above, we can assume that risk may happen in every aspect of human life, and it has severity impact to the object of risks. are more detailed from the experts. According to Carl Olsson: Risk is something that happens in the future but cannot be predicted exactly today because there is uncertainty. Risk and uncertainty do not have to be negative factors.5 Risk if the uncertainty of future outcome(s)6 People tend assume that the risk faced always generate negative output in the future, the higher the risk the higher the negative output will be generated in the future, therefore it is important for the risks to be avoided. However, according to the statement above, the output of risks or uncertainty is not always generating negative output. This is true if the company can manage the risks well in order to get the benefit of it. It is a common definition of risks; therefore the writer will present other definitions of risks that
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http://www.transfieldservices.com/page/Online_Orientation/Risk/Definition_of_Risk Carl Olsson, Risk Management in Emerging Markets, Prentice Hall, 2002, pp. 6 *!Carl Olsson, Risk Management in Emerging Markets, Prentice Hall, 2002, pp. 5!
2.2 Operational Risk Operational risk refers to financial loss resulting from a host of potential operational breakdowns that we can think of in terms of people risks, process risks, and technology risks (e.g., frauds, inadequate computer systems, a failure in controls, a mistake in operations, a guideline that has been circumvented, or a natural disaster).7 Operational risk can be said the oldest risk that are already faced by firms. However, in the past firms more focusing on what physical losses that they may experience, such as damaged goods, human error, etc. Recently, the management focuses more on the techniques on how to minimize the chance of loss. Operational risks focuses on four causes, which are internal risk, people risk, system risk, and external risk.8
Figure 2.1 Operational Risk
Internal risk Losses from failed transactions, settlements and every day business processes. Marketing errors, miselling, and incorrect reporting are several examples of internal risk that might happen in a firm. Internal risk also correlated with the level of efficiency in a firm.
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Olsson, Risk Management in Emerging Markets, Prentice Hall, 2002, pp. 46! to Basel Committee, 2004.!
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People risk People risk is the potential losses caused by employee of a company. The incident can be intentional or unintentional. Besides, people risk also may happen with outside party of the company, such as their relationships with clients, shareholders, etc. System risk System risk arises from disruption of business process that caused by the system failure of infrastructure or IT. Nowadays, firms are very dependant with technology and systems that supported it, therefore the system failure is very likely to happened. System risk can be caused by hardware or software system breakdown, programming error, and computer virus. External risk Potential losses because the actions of third parties and other outside forces. The probability of this event is rarely to happen, but once the event occurred, it has high severity towards the company. Changing in regulations, external fraud, terrorism, and even natural disaster can cause external risk. Fraud, unauthorized trading, and incompetency of the employee are the causes of people risk.
2.3 Definition of Risk Management As explained before, risks always occur in every aspect of business that may hamper the process of a business. Therefore it is important for a company to have and develop risk management skills within the company itself. Risk management is not a one event for the company, but it is a continual process in decreasing the risks that may occur in a particular company. In the past, risk management often associated with the use of insurance, especially hedging that is used for interest rate and foreign exchange risks. Nowadays, firms started to pay attention on how to manage operational risk. Tony Merna and Faisal F. Thani describe risk management as: Risk management is a formal process that enables the identification, assessment, planning and management of risks.9 Christopher Culp said that risk management: To view risk management only as the process of reducing risk is to miss potentially significant efficiency enhancement and new business and product development opportunities.10 Risk management is not limited to only reducing the impact of risks that occur in a company, but wider. A proper risk management is not only done when there are events that may affect the performance of the company, but proper risk management also sets direction for the business as a whole in order to achieve the companys goals.
Merna, Faisal F. Thani, Corporate Risk Management, John Wiley & Sons, Ltd, 2008, pp. 2! %.!Carl Olsson, Risk Management in Emerging Markets, Prentice Hall, 2002, pp. 99!
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Almost every company done similar risk management in their internal process, however, they use different specific method. Some companies structure their risk management process with more formality and centralization than others, but they have the same five-steps process11
Figure 2.2 Risk Management Cycle 12
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Christopher, The Risk Management Process, John Wiley & Sons, Inc, 2001, pp. 210.! Culp, Christopher, The Risk Management Process, John Wiley & Sons, Inc, 2001, pp. 210.
According to Crouhy, there are several measures that should be taken by company in their risk management.
Identify Risk Exposure
Measure and Estimate Risk Exposure
Find Instruments and Facilities to Shift of Trade Risks
Assess Effects of Exposure
Assess Costs and Benefits of Instruments
Form a Risk Mitigation Strategy: Avoid Transfer Mitigate Keep
Evaluate Performance
Figure 2.3 Risk Management Process (Crouhy, Galai, Mark, 2006: 2)
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2.2.1 Risk identification Risk identification is the process by which as company recognizes and, in some cases, detects the different financial risks to which it is exposed through the normal course of conducting its business.13 The first step in risk management is the risk identification process. Risk identification is very vital to the company. Risk identification step will describe what are the risks that might happens, before it actually happens and become problems that will give negative impact to the company. It is very important to be able to capture as many risks asp possible. During this process, all possible risk should be submitted. There are several ways in identifying risk, which are historical data analysis, survey and observation of the business process, especially the production process, benchmarking and expert opinion. annual report. 2.2.2 Risk measurement Risk measurement involves the quantification of certain risk exposures for the purpose of comparison to company-defined risk tolerances14 Risk measurement is the second step in risk analysis. In risk In this paper, the writer will focus on historical data analysis that the writer gets from the companys
measurement the company should calculate the risks that may faced by the company. This step also plays important role in risk analysis, because if the company only able to identify the risk, but they cannot calculate the effect of the risk, the company still exposed to those risks.
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Risk measurement depends on several
Christopher, The Risk Management Process, John Wiley & Sons, Inc, 2001, pp. 210.! Christopher, The Risk Management Process, John Wiley & Sons, Inc, 2001, pp. 211.!
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things, which are knowledge, information acquisition, culture, position, financial status, and perception. There are two ways to measure risks, which are quantitative and qualitative method. Quantitative method in measuring risk involving several calculation using financial formula, such as DOL, DFL, DIL, Poisson and so on. The qualitative method measure the risk by using how much the time for each risk happened and the impact they give to the company. Factors that the writer sees from the risks that occurred are the probability of the risk event to occur and the severity of the risk that affected the company. Based on those factors, the company then should make priority in managing the risks. 2.2.2.1 Monte Carlo Simulation Monte Carlo simulation is an analytical technique in which a large number of simulations are run using random quantities for uncertain variables and looking at the distribution of results to infer which values are more likely.15 Monte Carlo converts uncertainties in input variables of a model into probability distributions. By combining the distribution and randomly selecting the simulated model many times and brings out the probability of the output in the future. Monte Carlo simulation is widely used technique for dealing with uncertainty in many aspects of business operations. For example, in calculating the capital charge for operational risk loss, Monte Carlo simulation if performed to obtain the distribution of the aggregate loss over a specific time period. Monte Carlo is crucial in finance, where there is fair amount of uncertainty and risk involved with estimating the future value of figures or amounts due to the wide variety of potential outcomes.
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This simulation
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technique helps to reduce the uncertainty involved in estimating future outcomes.16 In this paper, the Monte Carlo simulation will be conducted by using Risk Sim 2.40. The steps in using Risk Sim 2.40 will be described below. 1. Simulate the minimum and maximum data by using uniform simulation for the number of probability and severity of a risk event. The researcher use uniform simulation in order to convert the data to make it more precise and assured. This method is based on paper benchmark.17 2. Simulate the mean and standard deviation from the result of the previous simulation to normal distribution 3. The normal distribution results showed the classification of the probability and severity of the risk event that is divided into quintile.
< X 1.5_
(X 0.5_) to (X 1.5_)
X + 0.5_
(X + 0.5_) to > X + 1.5_ (X + 1.5_)
X mean _ Stdev
Figure 2.4 Risk Simulation Distributions
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Based on the normal curve above, the risks are classified as follows: < X -1.5 ! (X - 0.5!) to 1.5 ! X + 0.5 ! (X + 0.5!) + 1.5 ! > X + 1.5 ! 2.2.3 Risk Plotting The next step in risk management process is risk plotting. After measuring the identified risks, in risk plotting those risks are arranged based on the segments so that the company could identify the characteristic of each risk and take suitable actions to each risk. In risk plotting step, risks are characterized based on the probability of the event to occur and the severity of the risk to the company. Risk matrix is an effective tool to illustrate the importance of risk management strategies as part of contingency planning (Marshall and Alexander: 2006). plotting matrix that will be used in this paper. Below is the risk=Very low = Low = Moderate = High = Very high
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Figure 2.5 Risk Plotting Matrix
Very high (12-25) = Urgent action to be taken that will reduce the level of risk to tolerable or less High (8-10) Tolerable (3-6) Low (1-2) = Detailed action plans required that will reduce the level of risk to tolerable or less = Managed by keeping under review and through continued good practice = Manage through continued good practice
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2.2.4 Risk Mitigation The last step is in risk management is what actions should the company take in order to mitigate the risks. Risks cannot be eliminated; we can only minimize the risks. Minimizing the risks here means that we have to transform the risk into something else that is not give disadvantages to the company. In minimizing the impact of the risks, there are four actions that the company could take, which are Transfer, Avoid, Retain, and Control.
Figure 2.6 Risk Mitigation Matrix
2.2.4.1 Transfer Risk By using risk transfer method, the company shift the risks to third parties by means of an insurance policy in order to minimize the risks that may happen to the company in exchange of something else, for example the company must pay those third parties if they want to use their services.
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2.2.4.2 Control Risk Mitigating the risk using this method means that the company should prepare for prevention system, protecting the systems, and other things that may reduce the negative affect from risks. 2.2.4.3 Retain Risk The company tolerates risks that happen to them, because there are no other ways for the company to avoid the risks, or the company already expects the risks to happen. The risk usually comes from external factor, such as government regulation. Capital allocation is the main method in retaining the risks. 2.2.4.4 Avoid Risk Risk avoidance means that the company should find other substitution, eliminate factors that may cause the risks to emerge, and changing the process of how everything worked. Risks that is usually are avoided usually have huge impact to the company if it is happened.
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CHAPTER 3 METHODOLOGY 3.1 Research Method Methods used in this research are the use of experimental method in order to test theories and hypotheses by using empirical data and descriptive method. By using experimental method, researcher describes the problems and finds the result by measuring related variables. Measuring the variable in the meaning of manipulation of the variables to test a hypothesis. The result of the test will measure to find the outcome of the research. Descriptive method, or also called statistical research, focusing on describes the data and the characteristics of the factors involved in the research. Researcher then finds the relationship between the data and characteristics to make conclusion of the research. Steps that are use in this research are described below.
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Problem Identification
Research Objective
Literature Study
Data Collection
(Primary data and Secondary data)
Data Analysis
(Business process, risk identification, risk measurement , risk mitigation)
Conclusion
Figure 3.1 Methodology
3.2 Research Steps explanation 3.2.1 Problem Identification Problem identification process will elaborate on what problems that PT. Pertani (Persero) faced regarding risks that happen in the company. This phase consist about the key questions of the whole research and determining what are the data needed for the research. The main problems that the writer focuses are on the rice business unit of the company that is experienced losses from time to time. The writer will see it from the operational risk management of the company. &. !
3.2.2 Research Objective Research objective will consist of what the writer want to accomplish in the paper and use the objectives as guidelines in doing the research. The objective of the research is to analyze the operational risks that might occurs in the company and the effect to the companys performance. In addition, the writer will also try to give recommendation and suggestion regarding managing the risks that may increase the performance of the company. 3.2.3 Literature Study In this phase the writer will gather theories that is related with the topic of the paper. The study explains about the theories of operational risk as a whole and will be elaborate more on the process risk, including how to implementing risk management. The purpose of this study is to mastering the knowledge about risk management theories that the writer gets from articles in the Internet, books, journal, and other related literatures. Below are several points that the writer will describe in the literature study. 1. Risk analysis in corporate 2. Operational risk 3. Corporate risk management 3.2.4 Data Collection The next step was the collection of data needed in the research. The writer collects the data from PT. Pertani (Persero) regarding the business process of rice business unit by doing interview with the management and workers, observation on the operational activities in the factory, and also collecting secondary data from the companys documents. The methods will be described more below.
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1. Secondary data Secondary data is collection of data needed in the research that gathered from other sources of information other than the company itself that is already available. The secondary data are gathered from the various sources, such as from the Internet and books to gather theory for literature study. 2. Primary data Primary data is collection of data that are not available from other sources besides the company itself. The writer conducted primary data collection to gather data that might not available publicly. Primary data gathered from by doing interview and focus group discussion with the sources. a. Interview The writer gathers information by interviewing knowledgeable person from the company regarding risks that may occur in the company and also ask about historical events that happened in the past of the risks that might and had occurred. The writer also asked for financial data to the company from 2005 2007. b. Observation The writer directly visited PT. Pertani (Persero) and Cikampek factory, where the rice business unit doing the business processes. The reason why the writer chose this method of research is because the writer wants to see the companys business activity first-hand. c. Focus Group discussion In gathering data by FGD method, the writer did discussion with the companys managers that are related with the research topic. The FGD was done to analyze what is the main problem of the company; especially the companys rice business unit in order to determine what are the risks occurred in the business processes.
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3.2.5 Data Analysis After all the needed data have been collected, the next step is to analyze the data to achieve the objectives of the paper. This paper uses risk assessment method in analyzing the data, which consist of risk identification process, risk measurement process and risk mitigation process. The risk analyzing process will be divided into three sections according to the business process in the Rice Business Unit of PT. Pertani (Persero): 1. Procurement process. This stage of the business process includes the materials purchased and ensures the quality assurance of materials. 2. Production process. The next stage of the business process is the process of turning the raw materials into finished goods. 3. Marketing process. This stage regards choosing the right market to sell the finished goods and distributing the goods to the buyer. The next section will describe each process of risk assessment method. 3.2.6 Risk Identification Risk identification is the first step in risk assessment process. procurement process, production process and marketing process. This The identification process will base on the rice business unit process, study will focus on operational risk factors, which are the people involved, business process and system used at PT. Pertani (Persero). The writer will gathered all the needed data by conduction interview with the management and employee regarding the rice business unit, business process observation and analyzing secondary data from the historical document of the company. Those methods will be use to determine what are the risks that might occur from the business process. The outcome of risk identification process is the record of all risks that occurred in the process. Based on the findings, the writer will divide the risks occurred into three categories, which are people risk, process risk and system risk.
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3.2.7 Risk Measurement The next step in risk assessment is to measure the probability of the risks identified happen in the business process. This step will also measure the severity of the risks that might happen to know the financial impact from each risk to the performance of the company. Due to the limitation of time, the writer will only conduct interview to the management and employee in order to get the required data for the risk measurement process. The probability measured based on the day the event happen per month annually. The severity of the risks will be using ranged amount of money per month annually or the amount of quantity that will be described more in each risk. In order to do in-dept analysis measurement, the data are analyzed by using Monte Carlo simulation by doing 1000 simulation of risk events. The result of Monte Carlo simulation is used to determine the classification of the probability and severity of the risk events. The next step after classified the risks based on the probability and severity, the risk then plotted the risk according the probability and severity in the risk matrix. 3.2.8 Risk Mitigation After the risks have been put in the matrix diagram, the next step is to prepare for the mitigation plan of each risk depend on the probability of the events and their severity to the company in order to minimize the impact on the operational performance of the company. The mitigation plan will be based on four activities, which are risk retain, risk control, risk transfer, and risk avoidance.
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3.2.9 Conclusion and Recommendation The conclusion will consist of the findings in the operational risks that the company faced and the impact of the risk towards the performance of the company. Based on the findings, the writer will also try to give recommendation to the company regarding their risk management in rice business unit in order to improve their operational performance in the particular business unit.
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CHAPTER 4 DATA COLLECTION AND ANALYSIS 4.1 Analyzing the business of PT. Pertani (Persero) In this part of the paper, the writer will describe the profile of PT Pertani (Persero) and their business activities, which runs in providing agricultural goods. 4.1.1 Company History PT. Pertani (Persero) is a state-owned company that runs in providing necessities and distributing agricultural goods, especially organic and nonorganic fertilizer and rice seeds. The company was established in accordance to the emergency law no: 1 of the year 1959, dated January 1st 1959 for the purpose of foods production and land clearing. Abbreviated as EPFLC (Enterprise for the Production of Food and Land Clearing). The EPFLC was converted to the state owned enterprise for agricultural law by law no:19/1960 abbreviated as SE. And later the government issued a government regulation no: 12/1963 dated January 1st 1963 in lieu of previous law no: 19/1960. And the company was again altered to state owned agriculture enterprise abbreviated as SAE. In 1973, SAE Pertani has become Persero, in accordance to the government regulation no: 21 year 1973 and deed was made at the notary public, deed noL 46 dated January, 11 1974 and company registration no:136 dated April, 24th 1974. And notary public made another deed, deed no 45 dated February, 6th 1984 SAE Pertani thus became PT Pertani (Persero) PT Pertani (Persero) has three core businesses: a. Distribution of fertilizer b. Production and distribution of rice c. Production and distribution seed and 2nd crop seed. PT Pertani (Persero) also has other businesses other than core business that are already stated above. PT Pertani (Persero) also runs on the distribution of pesticides and other chemicals for agricultural need, such as ZPT, PPC, ! &+
Vaccine. PT Pertani (Persero) also play role in the distribution of agricultural hears and equipment trade of natural products and warehousing, transportation and cultivating service. As mentioned above, one of the core businesses of PT Pertani (Persero) is rice production. PT Pertani (Persero) production of rice has reaches 50.000 ton per annum, including aromatic, quality and medium-quality rice products by 17 RMUs (Rice Milling Unit) scattered across Java, Bali, South Sulawesi and Lampung. 4.1.2 Company's Goals To implement and support the governments policies and programs on economy and national development in general and agricultural development particular by applying the principles of limited liability of the company. 4.1.3 Company's Culture Working is part of religious devotion Think positively, honesty and work with professionalism Proactive to increase company's performances Try to achieve a better result To maintain an atmosphere of togetherness, among employees and solve all problems with win-win solution. 4.1.4 Corporate Organization The corporate organization of PT Pertani (Persero) covers all areas within all Indonesias provinces consists of: 1 (one) head office 7 (seven) marketing area manager with 34 branches 1 (one) seed production area manager 1 (one) strategic business unit (SBU) of rice
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4.1.5 Organization Structure 4.1.5.1 Board of Director
Figure 4.1 PT. Pertani (Persero) Board of Director structure
4.1.5.2 Board of Commissioner
Figure 4.2 PT. Pertani (Persero) Board of Commisioner structure
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4.1.6 Management Information System Management Information System (MIS) is software use by PT. Pertani (Persero) as a tool to help information flow of their business process. MIS have significant impact to the companys business processes, especially in rice business unit. MIS used in every aspect of their business processes, started from the inventory record, production output and it also included buy-sell transactions. PT. Pertani (Persero) main offices, branch, and factory implemented this software that is connected to a server that is located in the main office in order to control the data processing. Management Information System, especially activities involving the financial transactions is in cooperation with Bank Mandiri. Management Information System (MIS) plays important role in the identification of risks in PT. Pertani (Persero). This system is use day-today basis in the company that controls the entire activities; single mistakes in the system will ruin the business process of the company entirely. Therefore it is important to understand how the systems works in order to minimize the risks that may occur regards technology system used. Below is the picture of the system topology that is used in PT. Pertani (Persero).
Procurement
Production
Marketing
Figure 4.3 Management Information System flow
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4.1.7 Company Business Process The paper divides the risk identification to three parts according to the companys business process in rice business unit. This was done to identify specifically the risks that may occur in each business process. PT. Pertani (Persero)s rice business unit divided their business process into three steps, procurement process, production process, and marketing process. These are the workflow of each process and brief description to interpret the diagram. 4.1.7.1 Procurement Process
Middlemen
Quality Assurance
Purchasing
Inventory
Warehouse
Shipping
Figure 4.4 Procurement Process
The procurement process started from negotiating with the middlemen as their supplier to buy the raw materials for rice, which is paddy. After the raw materials passed several quality assurance process to makes sure that the raw materials have desirable quality, the company makes purchase transaction and then shipped the raw materials to the warehouse in order to process the raw materials into finished goods. The main issue in the procurement process is how to find high quality raw materials with the lowest price as possible from the suppliers.
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4.1.7.2 Production Process
Dried
Feedeng Hover
Unholled Rice Sieve
Hasker
Greder
Polisher III
Polisher II
Polisher I
Quality Assurance
Packaging
Distribution
Figure 4.5 Production process
After the product arrived at the warehouse, the paddy undergoes the first production process, which is dried processing. In the first process, the paddy is placed in an open lot exposed to the sun rays in order to dampen the water contents in the paddy before it proceed to the next process. The dried paddy then moved to the feeding hover to accommodate the dried paddy before it enters sieving machine. Using elevator, the paddy moved to the sieving machine to separate good quality paddy with the broken ones. After the separation process then the paddy moved with elevator to the Hasker. Hasker works as crushing machines that separate the paddy from its crust to get the rice. The next step is to put the rice into a series of polisher machines to refine the shape of the rice. More fine the shape of the rice after it passed the polishing machines, the higher the quality of the finished rice. The last production process of the rice is to enter the greder machine. In the greder machine, the good quality rice is separated with the broken ones to make sure the rice that is produced has high quality.
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After the finished rice has passed quality control, they are ready to be packaged as order then distributed to the customers. It is a common thing for the machines to experienced breakdowns; therefore it is important for the company to be able to maintain the condition of the machines in order to runs the production process more effectively. 4.1.7.3 Marketing Process
Inventory
Distribution
Modern Market
Institution
Inter Island
Traditional Market
Figure 4.6 Marketing process
PT. Pertani (Persero) distinguish their target market into four groups: (1) Modern market, (2) Institution, (3) Inter island and (4) Traditional market. Their target market that is included in the modern market is a hyper store that provides large retail products, such as Giant and Carrefour. McDonalds. Institution market included PT. Pertani corporations and restaurants that need rice supplies, such as Their third market is inter island. (Persero) also distributed their goods to other island besides Java, usually they distribute their goods to Batam, Sumatra and Irian Jaya. Their last rice market is the raditional market. Pasar Induk
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Cipinang is one example of their target market in traditional market. It is important for PT. Pertani (Persero) to be able to identify the most potential market. If they are failed to do so, it may affect the performance of the company in terms of financial performance. 4.2 Risk Analysis Risk Identification After we analyze the business process of rice business unit, we can identify what are the operational risks that occurred in the process event. Table below showed us the identified risks which the writer gathered from PT. Pertani (Persero), by conducting interview with the employee, observation, and analyze company's database. The risk identification will be divided based on the business process of rice business unit in PT. Pertani (Persero), starting from procurement, production process and marketing process. 4.2.1 Procurement Process
Table 4.1 PT. Pertani (Persero) Procurement process Risk Identification No. 1 2 3 4 People Risk Process Risk System Risk Type of Risk Risks Data manipulation Fault in inputting data Material substandard System Breakdown
4.2.2 Production Process

Table 4.2 PT. Pertani (Persero) Production process Risk Identification No. 1 People Risk 2 3 4 5 6 System Risk Process Risk Type of Risk Risks Machine operator lacks of skills Workers discipline Workers health Inventory data Inventory damage risk Machine breakdown
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4.2.3 Marketing Process

Table 4.3 PT. Pertani (Persero) Marketing process Risk Identification No. 1 Type of Risk Process Risk Risks Distribution process
Explanation of Table 4.1, 4.2 and 4.3: Procurement Process People Risk Data manipulation Data manipulation risk may occur when somebody manipulating data inputting related with the transactional activities in the procurement process. The event may consist of a person that is manipulating the transaction number in the Management Information System (MIS) for their personal benefit. Fault in inputting data It is a risk that is caused when someone in company make mistakes in inputting the data to the MIS software. This risk can be happen because there is employee negligence. This risk may cause the flow of information within the company to disrupt. Process Risk Material substandard Selecting the right materials is crucial in determining the quality of the rice produced. It is important for all the procurement team to know what quality of the material that is appropriate. Bad quality of materials will increase the risk of producing bad quality rice that will affect the performance of PT Pertani (Persero). System Risk System breakdown PT. Pertani (Persero) uses Management Information System to support their business activities. It is a risk when the system is not able to run properly to support the business activities. This is mainly caused by the system failure.
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Production process People Risk Machine operator lack of skills It is the risk that occurred when the operator doing mistakes in executing the machines used in the production process. The lack of skills of the operator will impact the efficiency and productivity of the process. Workers discipline It is a risk that may occur by individuals regarding the productivity of the workers performance that might disturb the companys production process that eventually will give losses to the company. Workers health risk The risk occurs regarding the health condition of the workers due to the working condition in the factory. Process Risk Inventory data risk PT Pertani (Persero) depends on their Management Information System (MIS) to arrange their business process, including inventory data. The risk may occur when the actual amount of inventory stored in the warehouse is different with the one that is recorded in the Management Information System (MIS). Inventory damage risk It is a risk that may occur when the inventory, whether the raw materials or finished goods, are damaged when they are stored in the warehouse. Insects and failure in material handling mainly cause the damage of the inventory.
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System Risk Machine breakdown PT. Pertani (Persero) uses heavy machines in processing the product. It is very crucial for the company to be able to maintain the performance of the machines. It is a risk that happens because the machine used in the production process is broken down. The machine breakdown considered as a huge problem to the company, because when it happens, the production process is stopped entirely and may causing the company experiencing losses. Marketing process Process Risk Distribution process After the production process has been finished, PT. Pertani (Persero) then delivered their goods to their buyers. PT. Pertani (Persero) delivered the goods by themselves, without using third party services. In the distribution process, it is likely for the goods to broke or even did not arrived in destination. 4.3 Risk Measurement After identified possibilities of the risks, this chapter will discuss the probability and severity for each risk that occurred. (Persero) management and employee. The measurement process on determining the probability and severity is based on interview with PT. Pertani The writer will do simulation on the probability and severity in order to do quantitative analysis by using Risk Simulation software. The risk measurement will be divided according to the business process conducted in PT Pertani (Persero) rice business unit, which are procurement process, production process, and marketing process.
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4.3.1 Procurement Process 4.3.1.1 People Risk In this part of risk measurement, the researcher will discuss about the probability and severity of risks that might happen involving people factor inside the business process of PT. Pertani (Persero). The events referred to the actions of the companys employee in the business process. 4.3.1.1.1 Data manipulation MIS system records all transactions data, including payment, inventory data, even revenue that the company gets. It is very possible for the employee to manipulate the data so that they can get personal benefit from it. Example of the personal benefit that employee could get by manipulating the data in MIS is that they could insert in the system higher cost for raw materials, therefore they could get the excess amount of cost for their personal gain. It is possible for every employee involved in the process to do the manipulation.
Code Probability 1 2 3 4 5 Very low Low Moderate High Very high
Criteria Very unlikely to occur Unlikely to occur 50% likely to occur Likely to occur Very likely to occur
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Code Severity 1
Criteria company's operation; the company experiencing insignificant losses.
Very low There is no significant impact to the
Low
There is no significant impact to the company's operation; the company experiencing considered amount of losses.
Moderate Company's operation started to disrupted; the company experiencing huge amount of losses.
High
Company struggled to run their operation due to the impact of data manipulation; the company experiencing huge amount of losses.
Very high
The company cannot continue its operation due to the huge loss of company's asset that leads to bankruptcy.
Based on the qualitative data, the probability of the risk to occur is Unlikely and the severity of this particular event to the company is considered in Low level.
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4.3.1.1.2 Fault in inputting data In order to arrange the information flow in the production process, the company uses MIS software as supporting tools. The MIS software record all the production processes, started from raw material and finished goods inventory and production costs. For every transactions and actions the employee made are recorded in the MIS software that connected with the other business processes that is important for the flow of information.
The risk measurement will be based on qualitative data by interviewing the manager that is in charge of the production process. Based on the interview result, the manager said that there is a low possibility for the employee to make mistakes in inputting the data to the software, because the entire employee have been trained to use the software.
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Code Severity 1 Very low
Criteria The mistakes in inputting the data can be handled easily without impeding the business process and information flow.
2 3
Low Moderate
The mistakes need higher effort to be fixed, but the company can still maintain the information flow. The information flow is slightly hampered and the impact to the business process relatively small; the company needs to put quite huge extra time to fix the mistakes.
High
The information flow is hampered and the impact to the business process is high; big amount of time to fix the data and contribute to quite huge amount of losses.
Very high
The information flow of the business process is in disarray that leads to huge amount of losses and time to fix the data that causing the company's production activities to stop.
The result from interview regarding the severity of risk is very low impact, because the employees can directly notice when they made mistakes in inputting data and fix the mistakes immediately.
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4.3.1.2 Process Risk 4.3.1.2.1 Material substandard To make a high quality rice product, it is important to have high quality of the material also, in this case PT. Pertani (Persero) has to find high quality paddy from the middlemen. According to the interview, high quality paddy will only shrunk the water content after drying process as much as 15% to GKG (Gabah Kering Giling) and the next process to get the finished rice, the water content have to be shrunk as much as 35% to get high quality rice. However, not all paddies that PT Pertani (Persero) procure from the middlemen are appropriate with the standard of PT. Pertani (Persero). PT. Pertani (Persero) buy the paddy from middlemen every month, due to the capacity of the silo. One-third of the entire annual procurement process resulted in bad quality paddy. Bad quality paddy shows when the first shrink process of paddy into GKG, the water content decrease higher than 17% and the next water content shrink, the water content decrease higher than 40%. Based on the interview with the manager in the Cikampek Factory, the risk event happens one-third every year in average, which means there is 4 times in a year that this risk happened. Number of faults in selecting materials: 4 times in a year Probability = 4/12 = 0.33
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Figure 4.7 Histogram of Material substandard risk for probability
Based on the simulation, the mean (X) of the material substandard is 49.68% and the standard deviation (!) is 28.85%. As the result the risk level classification of risk probability are as follow. < X -1.5 ! (below 0.0626) 0.3521 1.5 ! (between 0.0626 0.3521) X + 0.5 ! (between 0.3521 0.6416) 0.6416 + 1.5 ! (between 0.6416 0.9311) > X + 1.5 ! (above 0.9311)
(X 0.5_) to (X - 1.5_)
=Very low = Low = Moderate = High = Very high

(X + 0.5_) to > X + 1.5_ (X + 1.5_)
< X 1.5 _
X + 0.5_
Mean:49.68% Stdev: 28.85%
Figure 4.8 Material substandard for probability classification
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Based in the simulation, the result of material substandard to happen in the company is between 0.0626 0.3521 which is considered as Low level of probability.
Criteria < 0.0626 0.0626 0.3521 0.3521 0.6416 0.6416 0.9311 > 0.9311
Measurement for severity will be based on the sales on 2007. The maximum loss that the company might get from this risk is based on the difference in the rice produce based on the shrunk in the water content that determines the quality of the rice. All of the calculation will be on monthly basis. The normal amount of decrease in water content 15% and 35% Amount of GKS (Kg) = 244,773 15% shrunk in water content = 244,773 (2447,73*15%) GKG = 208,056 kg 35% shrunk in water content = 208,056 (208,056*35%) Finished rice = 135,237 kg Sales revenue = rice quantity (Kg) * price (IDR) = 135,237 kg * 5,174 = IDR 699, 736,604 The normal amount of decrease in water content 17% and 40% Amount of GKS (Kg) = 244,773 15% shrunk in water content = 244,773 (2447,73*17%) GKG = 203,161 kg 35% shrunk in water content = 203, 161 (203,161 * 40%)
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Finished rice = 121,897 kg Sales = rice quantity (Kg) * price (IDR) = 121,897 kg * 5,174 = IDR 630, 712,812 Losses due to the bad quality of raw materials = IDR 699,736,604 IDR 630,712,812 = 69,023,792 The losses due to the bad quality of raw materials will be used as the maximum range in Risk simulation software. IDR
Figure 4.9 Histogram of Material substandard risk for severity
Based on the simulation, the mean (X) of the material substandard risk severity is IDR 34,518,146 and the standard deviation (!) is IDR 19,641,315. As the result the risk level classification of risk severity are as follow. < X -1.5 ! (below IDR 5,056,173) 380,744 1.5 ! (between IDR 5,056,173 24,697,489) X + 0.5 ! (between IDR 24,697,489 44,338,805) 703,736 + 1.5 ! (between IDR 44,338,805 63,980,120) > X + 1.5 ! (above IDR 63,980,120) =Very low = Low = Moderate = High = Very high
()
< X 1.5 _
(X 0.5_) to (X - 1.5_)
X + 0.5_
(X + 0.5_) to > X + 1.5_ (X + 1.5_)
Figure 4.10 Material substandard risk for severity classification
To find the severity level of this risk, the writer will calculate the actual severity that is experienced by the company according to the probability of the risk to happen. The calculation will be based on the total loss that the company could get by not having the best quality of raw materials, using companys sales data in 2007. Probability of the risk: 33% Maximum sales for the company: IDR 69,023,792 Actual severity = 33% * IDR 69,023,792
= IDR 22,777,851
Based in the simulation by using range of severity between IDR 0 69,023,792, the severity for material substandard risk to happen in the company is IDR 22,777,851 that is between IDR 5,056,173 24,697,489, which means that the severity for material substandard risk is considered in Low level. Code Severity 1 Very low 2 Low 3 Moderate 4 High 5 Very high Criteria Loss of sales IDR < 5,056,173 Loss of sales IDR 5,056,173 24,697,489 Loss of sales IDR 24,697,489 44,338,805 Loss of sales IDR 44,338,805 63,980,120 Loss of sales > IDR 63,980,120
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4.3.1.3 System Risk Risk measurement in system risk is related to compute the probability and severity of risk events that emerge from operational system of the company. The operational systems included in the company are the technology used, such as the production machines and Management Information System. 4.3.1.3.1 System breakdown System breakdown risk explains about the impact that the company might faces because of the Management Information System (MIS) software used for the flow of information is not running well. Management Information System (MIS) software is very crucial in the companys business process. Management Information System (MIS) play a role in maintaining the smoothness of information flow throughout the business processes. The system breakdown might be caused by many reasons, such as lack of maintenance and data overload without software updates. The probability of this risk measures how many times the system breaks in a month. Based on the interview with the manager, PT. Pertani (Persero) have never experience any Management Information System (MIS) software breakdowns. Therefore, the writer will analyze this risk by using qualitative method from the interview result. The severity measures how much the impact this risk to the performance of the company and also will be measure based on interview with the manager.
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The probability of the risk event to occur is low because it the MIS software always maintenance annually to prevent the system breakdown, but the event still possible to happen.
Code Severity 1
Criteria flow because the problem can be easily repaired.
Very low The damage of the MIS does not affect the information
Low
The MIS system partially damaged resulting in the lost of half the data for the business process; the problems need higher effort to be fixed.
Moderate The system damaged causing the data to be lost, but the office has the backup data to recover it immediately.
High
The system damaged entirely without any backup data in the office, but can be obtained from other branches offices backup data; quite huge amount of cost and time needed to recollect data.
Very high
The system damaged heavily that causing the information flow to stop resulted in entirely and entire data loss; huge amount of cost to repair the whole system and time to recover the system.
Based on the interview with manager, PT. Pertani (Persero) has high severity towards system breakdown risk, because MIS software is very crucial in the companys information flow in running the business process, especially for rice business unit. And when the system breakdown, the entire business process will be disturbed, but the company still prepare backup data in other offices.
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4.3.2 Production Process 4.3.2.1 People Risk 4.3.2.1.1 Machine operator lack of skills PT. Pertani (Persero) relies on heavy machines in their production processes. The factory has one set of heavy machines for producing the rice in the Cikampek Factory. The operator runs those machines. Operator is the one who make sure that the machines are running well in order to produce finished goods. Adequate skills are needed to make sure the production process by the machines running smoothly. Failed in operating the machines well might causing the production process to stop, or in the extreme events the machines might even be broke by the operator. The machine operator lack of skills is uncountable, therefore in order to measure the risk, writer conduct qualitative analysis by doing interview with related employees.
PT Pertani (Persero) only has one set of machines to run the production process in Cikampek factory and the company conducts training for the machine operators. low. Therefore based on the interview results, the probability of the risk to happen and affecting the business process is very
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Code Severity 1
Criteria is slight decreasing amount of efficiency in the production process.
Very low The factory overall performance is not affected, but there
Low
The factory's overall performance is not affected, but there is significant decrease in efficiency of production process.
3 4
Moderate The factory overall performance is slightly affected and the production process efficiency is started to get higher. High The factory overall performance is affected and there is high decrease in the efficiency that leads to minor production loss for the company.
Very high
Factory's overall performance is highly affected caused by high decrease of process efficiency and it rise major loss for the company.
Severity of the risk in the company considered as moderate, because the lack of skills only slowed the production process in terms of decrease in process efficiency. However, by only having one set machines, it still can be considered as crucial factor for the performance of the factory. 4.3.2.1.2 Workers health The working environment in the factory is not as good the working environment in the office. The production processes generate by-product that may affect the health of the workers, such as dusts. The health condition of the worker is one factor that the company should consider to maintain the performance of the company. To measure the probability of the risk, the writer conducted interview with the manager in charge, and the result is that in two years, there is only
). !
maximum one people that is sick. Based on the previous, below is the actual probability of the risk event that is occurred monthly.
Probability = 1/24 = 4.167%
Figure 4.11 Histogram of Workers health risk for probability
Based on the simulation, the mean (X) of the workers health risk is 49.99% and the standard deviation (!) is 28.49%. As the result the risk level classification of risk probability are as follow. < X -1.5 ! (below 0.0726) 0.3575- 1.5! (between 0.0726 0.3575) X + 0.5 ! (between 0.3575 0.6424) 0.6424 + 1.5! (between 0.6424 0.9274) > X + 1.5 ! (above 0.9274) =Very low = Low = Moderate = High = Very high
)%
< X 1.5 _
(X 0.5_) to (X - 1.5_)
X + 0.5_
(X + 0.5_) to > X + 1.5_ (X + 1.5_)
Figure 4.12 Workers health for probability classification
Based in the simulation by using range of probability between 0% - 100%, the probability for workers health risk to happen in the company is 4.167% that is below 0.0726 that is considered as Very Low level of probability.
Criteria < 0.0726 0.0726 - 0.3575 0.3575 0.6424 0.6424 0.9274 > 0.9274
In order to measure the severity of the risk event to the performance of the company, the writer calculate the cost that the company spends for the workers treatment to a hospital. The measurement will be based on assumption of the worst-case scenario, which is when all of the total 22 employees are needed medical treatment. Sick employee: 22 persons Medical treatment cost that spends by the company: IDR 50,000/person Total cost expenditure = 22 * IDR 50,000 = IDR 1,100,000
)& !
Then, the actual severity that is experienced by the company based in the probability of the risk to happen is state below. Probability: 4.167% Total cost expenditure: IDR 1,100,000 Actual severity = 4.167% * IDR 1,100,000 = IDR 45,833
Figure 4.13 Histogram of Workers health risk for severity
Based on the simulation, the mean (X) of the workers health risk severity is IDR 542,240 and the standard deviation (!) is IDR 322,991. As the result the risk level classification of risk severity are as follow. < X -1.5 ! (below IDR 57,753) 380,744 1.5! (between IDR 57,753 380,744) X + 0.5 ! (between IDR 380,744 703,736) > X + 1.5 ! (above IDR 1,026,728) =Very low = Low = Moderate = Very high
703,736 + 1.5! (between IDR 703,736 1,026,728) = High
)'
< X 1.5 _
(X 0.5_) to (X - 1.5_)
X + 0.5_
(X + 0.5_) to > X + 1.5_ (X + 1.5_)
Figure 4.14 Workers health for severity classification
Based in the simulation by using range of severity between IDR 0 1,100,000, the severity for workers health risk to happen in the company is IDR 45,833 that is below IDR 57,753 that is considered as Very Low level for severity. This is related with the probability of the event, because it is rarely happen in the company, therefore the impact also insignificant. Code Severity 1 Very low 2 Low 3 Moderate 4 High 5 Very high Criteria Loss of profit < IDR 57,753 Loss of profit IDR 57,753 - 380,744 Loss of profit IDR 380,744 703,736 Loss of profit IDR 703,736 1,026,728 Loss of profit IDR > 1,026,728
4.3.2.1.3 Workers discipline PT. Pertani (Persero) facility that is located in Cikampek has a total of 17 workers for the production process. With the relatively small number in workers, it is very important for the company to maximize their workers performance in order to get high production efficiency. This is where the discipline level of the workers becomes important, that determines the performance of the workers, even it may cause losses to the company. The probability and severity of this risk is uncountable, therefore the writer will use qualitative method in measuring the risk by conducting
)( !
interview with knowledgeable person in the factory. The probability and severity classification are described below. Code 1 2 3 4 5 Probability Very low Low Moderate High Very high Criteria Very unlikely to occur Unlikely to occur 50% likely to occur Likely to occur Very likely to occur
Code 1
Severity Very low
Criteria Company's operational activity is not affected, but there is increasing amount of operational time in the production process.
Low
Company's operational activity is not affected, but there is significant increase in of the operational time in the production process.
Moderate
Company's operational activity is slightly affected and there is higher operational time needed in the production process.
High
Company's operational activity is affected, huge amount increase in the operational time that leads to losses for the company.
Very high
Company's operational activity is highly affected, huge amount increase in the operational time that leads to huge amount of losses for the company.
))
Based on the interview, the result showed that the probability level of workers discipline is moderate. from area around the factory. This is mainly because most of the Meanwhile, the severity for workers worker is outsourcing without contract, the company collect the workers discipline is considered as moderate level. 4.3.2.2 Process Risk 4.3.2.2.1 Inventory data This risk is one of the most common problems that may happen in a company, especially company's that runs as producers. It is important for the company to be able to match the actual inventory with the recorded data in MIS. The huge number of inventory makes it possible to make false in counting that leads to mismatch in the data recording.
This risk considered as uncountable, therefore in order measuring the probability of the risk to happen and the impact to the company, the writer conduct interview with the person in charge of recording the inventory to get qualitative results. Based on the interview, it could be known that the mismatched between the actual inventory and the data recorded in MIS is likely to happen (High probability) due to the high amount of inventory they have to deal with. The probability table is stated below. Code 1 2 3 4 5 Probability Very low Low Moderate High Very high Criteria Very unlikely to occur Unlikely to occur 50% likely to occur Likely to occur Very likely to occur
)* !
Criteria The miss between actual goods with the recorded data in MIS is insignificant and does not affect the business process; both data can be adjusted immediately.
Low
Slight data missed in MIS but does not affect the business process and the information flow; needs quite amount of time to adjust the data.
Moderate
The amount of data missed in MIS is higher and started to affect the business process higher as well as the information flow; needs high effort to adjust the data.
High
There is significant miss between the actual and recorded data in MIS that disturb the business process and information flow.
Very high
There is huge miss between the data that majorly disturb the business process and the information flow
According to the interview conducted with the person in charge, the severity for this event to the company is on moderate level because with the high number of data that is mismatched, the employees need to have high effort in the matching process of the actual inventory with the data in the MIS. 4.3.2.2.2 Inventory damage risk PT. Pertani (Persero) supplied their raw materials monthly. The company bought supplies of paddy that will be processed as much as the amount of their storage facility in the warehouse. Not all of the materials are processed in the same day due to the capacity of the production machines. There are many factors that made the inventory damaged while in storage, such as insects. It is important for the company to be able to manage their warehouse so that the company does not experiencing huge losses.
)+
In order to determine the probability of the damaged inventory while in the storage facility, the writer measure using how many amount of paddy that is damaged based on the total inventory in year 2007. Damaged inventory in 2007: 34,644 (Kg) Total amount of inventory in 2007: 2,188,808 (Kg) Probability = 34,644 / 2,188,808 = 1.582 %
Figure 4.15 Histogram of Inventory damage risk for probability
Based on the simulation, the mean (X) of the inventory damage risk is 47.32% and the standard deviation (!) is 28.97%. As the result the risk level classification of risk probability are as follow. < X -1.5 ! (below 0.0387) 0.3284 1.5! (between 0.0387 0.3284) X + 0.5 ! (between 0.3284 0.6181) 0.6181 + 1.5! (between 0.6181 0.9079) > X + 1.5 ! (above 0.9079) =Very low = Low = Moderate = High = Very high
), !
< X 1.5 _
(X 0.5_) to (X - 1.5_)
X + 0.5_
(X + 0.5_) to > X + 1.5_ (X + 1.5_)
Figure 4.16 Inventory damage risk for probability classification
Based in the simulation by using range of probability between 0% - 100%, the probability for inventory damage risk to happen in the company is 1.582% that is below 0.0387 that is considered as Very Low level of probability.
Criteria < 0.0387 0.0387 0.3284 0.3284 0.6181 0.6181 0.9079 > 0.9079
The actual severity that is happening in the company is based on the probability of the risk for the total amount of inventory in year 2007, which will state below. Probability: 1.582% Maximum amount of loss in inventory value: IDR 12,923,027,143 Actual severity of the company = 1.582% * IDR 12,923,027,143 = IDR 204,542,999
)-
Figure 4.17 Histogram of Inventory damage risk for severity
Based on the simulation, the mean (X) of the inventory damage risk is IDR 6,541,161,822 and the standard deviation (!) is IDR 3,758,451,768. As the result the risk level classification of risk severity are as follow. < X -1.5 ! (below IDR 903,484,169) X + 0.5 ! (between IDR 4,661,935,938 8,420,387,706) > X + 1.5 ! (above IDR 12,178,839,475)
< X 1.5 _ (X 0.5_) to (X - 1.5_) X + 0.5_
=Very low
4,661,935,938 1.5! (between IDR 903,484,169 4,661,935,938)= Low = Moderate 8,420,387,706 + 1.5! (between IDR 8,420,387,706 12,178,839,475)= High = Very high
(X + 0.5_) to > X + 1.5_ (X + 1.5_)
Mean:IDR 6 ,541 ,161 ,833 Stdev: IDR 3 ,758 ,451 ,768
Figure 4.18 Inventory damage for severity classification
The inventory damage severity range is based on the total value of inventory in 2007, which are IDR 12,923,027,143 as maximum loss of the inventory value and IDR 0 as the minimum loss that the company might get from the risk. The actual severity of the risk to happen is IDR
*. !
204,542,999 that is below IDR 903,484,169, therefore the severity level is considered as Very low level. Code Severity 1 Very low 2 Low 3 Moderate 4 High 5 Very high Criteria < IDR 903,484,169 IDR 903,484,169- IDR 4,661,935,938 IDR 4,661,935,938 IDR 8,420,387,706 IDR 8,420,387,706 IDR 12,178,839,475 IDR > 12,178,839,475
4.3.2.3 System Risk 4.3.2.3.1 Machine breakdown In the production process PT. Pertani (Persero) depends on one set of heavy machines to process the raw material to become finished goods, which is rice. It is very crucial for the machine to be able to operate in their maximum performance in order to generate maximum profit also. However, it is can be avoided that the machines may breakdown due to technical problems that may appear incidentally. The breakdown of the machines may stop the entire production on the day the machines broke, which is very affecting the performance of the company in that day. To measure the probability of the risk to happen in the production process will be based on the how many times the machine breakdown in a monthly basis, in order to make the measurement more easy to understand and it is also recommended by the manager in the Cikampek factory. Number of days the machine breakdown: Probability = 2/12 = 0.167 2 times in one year
*%
Figure 4.19 Histogram of Machine breakdown risk for probability
Based on the simulation, the mean (X) of the machine breakdown risk is 50.653% and the standard deviation (!) is 29.392%. As the result the risk level classification of risk probability are as follow. < X -1.5 ! (below 0.0657) 0.3596 - 1.5! (between 0.0657 0.3596) X + 0.5 ! (between 0.3596 0.6535) 0.6535 + 1.5! (between 0.6535 0.9474) > X + 1.5 ! (above 0.9474)
< X 1.5 _ (X 0.5_) to (X - 1.5_) X + 0.5_

(X + 0.5_) to > X + 1.5_ (X + 1.5_)
Figure 4.20 Machine breakdown risk for probability classification
Based in the simulation by using range of probability between 0% - 100%, the probability for inventory damage risk to happen in the company is 16.7% that is positioned between 0.0657 0.3596 that is considered as Low level of probability, due to the rarity of the event to happen.
*& !
Criteria < 0.0657 0.0657 0.3596 0.3596 0.6535 0.6535 0.9474 > 0.9474
Calculation for severity range will be based on the sales revenue in 2007. Same with the calculation of probability, the calculation of severity will be based on average sales revenue in monthly basis. It assumed that the estimated maximum severity calculation for the machines is worst-case scenario, which is when the entire set of machine break down. Quantity sales x price per Kg = 135,237 kg x Rp5174.15 = Rp699,736,604 To measure the severity of the risk, the writer will calculate the actual severity that happened in the company based on the probability of the risk to happen in the business process. Probability: 16.7% Maximum loss possible: IDR Rp699,736,604 Actual loss in the company = 16.7% * Rp699736604 = IDR 116,622,767
Figure 4.21 Histogram of machine breakdown risk for severity
*'
Based on the simulation, the mean (X) of the machine breakdown risk is IDR 344,899,993 and the standard deviation (!) is IDR 196,442,995. As the result, the risk level classifications of risk severity are as follow. < X -1.5 ! (below IDR 98,221,497) 246,678,495- 1.5! (between IDR 98,221,497 246,678,495) X + 0.5 ! (between IDR 246,678,495 443,121,491) 443,121,491 + 1.5! (between IDR 443,121,491 639,564,487) > X + 1.5 ! (above IDR 639,564,487)
(X 0.5_) to (X - 1.5_)

(X + 0.5_) to > X + 1.5_ (X + 1.5_)
< X 1.5 _
X + 0.5_
Mean:IDR 344 ,899 ,993 Stdev: IDR 196 ,442,995
Figure 4.22 Machine breakdown risk for severity classification
Based in the simulation by using range of probability between 0% - 100%, the probability for inventory damage risk to happen in the company is 1.582% that is below 0.0387 that is considered as Very Low level of probability. Code Severity 1 Very low 2 Low 3 Moderate 4 High 5 Very high Criteria Loss of profit < IDR 98,221,497 Loss of profit IDR 98,221,497 - IDR 246,678,495 Loss of profit IDR 246,678,495 IDR 443,121,491 Loss of profit IDR 443,121,491 IDR 639,564,487 Loss of profit IDR > 639,564,487
*( !
Based on the calculation, the result of the severity level of machine breakdown is at Low level of severity that only generates loss profit between IDR 98,221,497 - IDR 246,678,495. 4.3.3 Marketing Process 4.3.3.1 Process Risk 4.3.3.1.1 Distribution Risk The last step of business processes in rice business unit of PT. Pertani (Persero) is marketing process, including delivers the finished goods to the customers. PT. Pertani (Persro) directly deliver the goods by themselves to the customers by using road transport. However, PT. Pertani (Persero) also done inter-island trade, and in this case, the company uses third party services to deliver the goods. In the risk measurement analysis, the writer will only discuss about the risk that happened in the distribution process by using road transport, because the other delivering method uses third party services that is considered as external risk that is not within the scope limitation of this paper.
The probability of this risk to happen in PT Pertani (Persero) is categorized as Medium level. Based on the interview, the main problem why this risk is on moderate level is that because the event is randomly happen and many external factors that affected the risk to happen, such as weather and road condition.
*)
Criteria Rice that is distributed to the customer are damaged insignificantly, but it can still be tolerate by the customers and there is no sales return.
Low
Rice that is distributed to the customer are damaged in small amount, but the customers can still tolerate the damaged with small sales return.
Moderate
High amount of rice that is distributed to the customers is damaged, the customers can still tolerate the damaged, but causing significant sales return.
High
Most of the rice that is distributed to the customers are damaged and the company receive high amount of sales return from the customers.
Very high
The entire rice that is distributed to the customers is all damaged and causing zero sales.
From the interview results, the writer can conclude that the severity of the risk to the company is considered as moderate level.
** !
4.3.4 Risk Summary Based on the risk measurement analysis, below is the risk summary table showed the level of each risk.
Table 4.4 PT. Pertani (Persero) Risk Summary Risk Type No 01. 02. 03. People Risk 04. 05 06 07 08 Process Risk 09 10 System Risk 11 Risk Name Data manipulation Fault in inputting data Machine operator lacks of skills Workers health Workers discipline Material substandard Inventory data Inventory damage Distribution process System breakdown Machine breakdown 1 3 2 4 1 3 2 2 1 3 2 3 1 3 4 2 Very Low Tolerable Low High Very Low Tolerable Tolerable Low Probability 2 2 1 Severity 2 1 3 Risk Level Low Very Low Low
*+
4.4 Risk Plotting The next step is plotting each risk according their level of probability and severity in order to determine the risks overall level.
Figure 4.23 PT. Pertani (Persero) Risk Plotting Matrix
Based on the plotting above, the risks are divided into five categories, depends on their risk level that will be shown below including what risk mitigation actions should be done to each risk in accordance of their risk level.
Table 4.5 PT. Pertani (Persero) Risk level
Risk Level 12 - 25 8 - 10 3-6 1-2
Risk Category Very High High Tolerable Low
Mitigation Action Avoid Transfer Control Retain
*, !
4.5 Risk Mitigation Risk mitigation is the last step in risk management process. Risks in general cannot be eliminated, including risks that occurred in the rice business unit business process. Risk can only be minimized in order to decrease the negative impact for the company. The risks faced by PT. Pertani (Persero) regarding their rice business unit can be manage by using four risk treatments, which are transfer, avoid, retain, control. 4.5.1 Transfer By using risk transfer method, the company shift the risks to third parties by means of an insurance policy in order to minimize the risks that may happen to the company in exchange of something else, for example the company must pay those third parties if they want to use their services. Below are the risks that is mitigate by transfer: 9. Distribution process Using insurance to third parties can mitigate this risk in order to minimize the impact to the companys business process. The company should conduct insurance to both the vehicle they use in transport and the goods itself. Therefore if something bad happens in the distribution process, the company would not experience full losses, because the risk is already transferred to third parties, in this case the insurance company. 10. System breakdown In order to mitigate the risk caused by system breakdown, it would be best for PT. Pertani (Persero) to make a contract with third party that is provided them with the Management Information System, in this case PT. Bank Mandiri Tbk regarding the maintenance and updates of the system. Therefore, it would minimize the impact of the risk to the company in the future.
*-
4.5.2 Avoid Avoid the risk that may occur means that the company should find other substitution, eliminate factors that may causing the risk to emerge, and changing the process of how everything work. Below are the risks that can be avoided by the company: 7. Inventory data Based on the observation in Cikampek factory, there is no significant system that is control the flow of inventory in the factory. In order to reduce the mismatched between recorded inventory data and the actual inventory, the company should change their process of data recording by implement better recording system for the inventor and it should be supported by having auditor team that periodically inspect the amount of inventory in the warehouse. By changing how they run the business process, especially in data recording, the company could avoid the risk and it will not appear in the future. 4.5.3 Control Mitigating the risk using this method means that the company should prepare for prevention system, protecting the systems, and other things that may reduce the negative effect from the risks. Below are the risks that can be controlled: 1. Data manipulation Data manipulation risk is rarely to happen in the company's business process and if the risk actually happened, the impact to the company is considered low. However, the company still has to manage the impact of the risk. The impact can be controlled by doing reconciliation and crosscheck on the Management Information System to identify if there are mismatch in the data.
+. !
3. Machine operator lacks of skills Conducting periodically training for the operator that is in charge of the machines can reduce the impact of this risk to the productivity of the companys business processes. Controlling by conduct proper training for the machine operator would not spend much capital expenditure, due to the low number of machines used in the factory. 5. Workers discipline In order to mitigate workers discipline risk, it would be best by control the risk. Controlling can be conducted by construct regulations regarding workers efficiency, such as by giving punishment to workers who not give their best performance, and on the other hand, giving reward to workers who give their maximum performance. 6. Material substandard When the company made transactions with the middlemen in order to supplied the raw materials needed, the company has their own quality control regarding the raw materials; therefore the probability for the risk to happen is very low. 11. Machine breakdown In order to control the machine breakdowns in the company, it is important for the company to always doing full maintenance check-up periodically. Moreover, it would be best if the machine mechanics check-up the machine every morning before doing the operation. Aside of working capital, the company should also preparing risk capital that will be used when the losses caused by risk events occurred. Value at Risk method could be use to determine how much capital the company should prepared.
+%
4.5.4 Retain The company tolerates risks that happen to them, because there is no other way for the company to avoid, or expect the risk to happen. Capital allocation is the main method in retaining the risks. Below are risks that should be retained by the company: 2. Fault in inputting data Every employee is trained in using the Management Information System to record every data of transactions and inventory. Therefore it makes the risk of fault in inputting data rarely to happen, and the Management Information System will give notification if the final recording data is unbalanced, so that the employee could directly correct the mistakes they made, which made the severity of the event very low. These made the company do not have to prepare any actions to mitigate the risk. 4. Workers health Allocating capital is the method that the company could use in mitigating the risk. By preparing for additional capital for loss caused by risk events, the company would not have to use their working capital to cover the loss occurred. 8. Inventory damage PT. Pertani (Persero) could retain the inventory damage risk to occur by allocating risk capital that will be used for covering the loss caused by risk events. The company could use Value at Risk method to determine the expected loss that the company should prepare.
+& !
Chapter 5 Conclusion and Recommendation 5.1 Conclusion In running their rice business unit, PT. Pertani (Persero) faces many risks that may hamper their business process. It is very important for the company to be able to identify and manage those risks so that it does not affect the business process of the company negatively. However, PT Pertani (Persero) still does not have implement risk management in their business process that makes them so vulnerable to the effect from the risks. Each division only see risks that is only occurred in their division, and identified risk that may happen only if there is special project, not on daily basis operation. Below is the type of risk level that is occurred in the rice business unit business process, started from procurement process, production process until marketing. TO measure the risk, the writer uses Risk Sim 2.40 in order to simulate the each risk. The result of the simulation used in classified the risk based on their level. Based on the measurement, it resulted that there are four categories of risk that occurred, which are very low, low, tolerable, and high level. The risk level showed the company what actions should the company do in order to mitigate the risks.
Very low 1. 2. 3. Fault in inputting data Workers health Inventory damage Low 1. 2. 3. 4. Tolerable 1. 2. 3. Distribution process System breakdown Workers discipline Table 5.1 PT. Pertani (Persero) Risk level summary High 1. Inventory data Data manipulation Machine operator lacks of skills Machine breakdown Material substandard
+'
The table showed that the distribution of the risks is mostly positioned between very low levels to tolerable level, with one possible risk that is at high level. It showed that the probability and severity of the risk are considered as low. However, the company should not just let this happen in the future, because even though the level of risks that commonly occurred in the company is low, but it still gives negative impact to the performance of the company's business process. The company should do mitigate actions to maintain their performance. Based on the risk level that occurred in the business process, there are four actions that the company could do to mitigate the risk, which are avoid, transfer, retain, and control. Mitigating the risks is a crucial action that the company should take, because it is important in decreasing the negative impact of the risk in routine business process. mitigate the risks.
Avoid Retain 1. 2. 3. 4. 5. Data manipulation Fault in inputting data Machine operator lacks of skill Workers health Inventory damage Transfer 1. Control 1. 2. 3. 4. 5. Inventory data Distribution process Workers discipline Material substandard Machine breakdown System breakdown
Below are the methods that the company should take to
Table 5.2 PT. Pertani (Persero) Risk Mitigation Summary
+( !
5.2 Recommendation Based on the risk analysis of PT. Pertani (Persero), the writer will try to propose recommendations for PT Pertani (Persero) regarding the rice business unit in order to help the company to increase their performance towards risk management. It is very important for the company to implement risk management, based on Enterprise Risk Management concept. By implementing ERM, the company now can identify risks that happen in their rice business unit continually and take appropriate actions to minimize the impact, especially to the financial performance of the company. Implementing good Enterprise Risk Management, especially in their operational processes, will also help the company to make better decisions by considering risk management actions for decisions they take. Hopefully, by implementing appropriate risk management, PT Pertani (Persero) will start to show good performance in their rice business unit by generating higher revenue for the company and will not experienced financial losses like in the past.
+)
+* !
REFERENCES
Carl Olsson, Risk Management in Emerging Markets, Prentice Hall, 2002. Crouchy, M, Galai, D, & Mark, R, 2006, The Essential of Risk Management (McGraw-Hill) Culp, Christopher, The Risk Management Process, John Wiley & Sons, Inc, 2001. Gustafsson, Jim A, Rule of Thumb for the Optimal Number of Runs in Monte Carlo Simulations (March 3, 2009) Kusumo, Apricianita, Enterprise Risk Management Case Study on PT Nusantara Rice Mills (PT NRM). 2008. Tony Merna, Faisal Thani, Corporate Risk Management, John Wiley & Sons, Ltd, 2008. Journal on risk management retrieved on 1st July 2009 from http://etd.library.ums.ac.id/gdl.php?mod=browse&op=read&id=jtptums-gdls1-2007-retnohanda-9459&newlang=indonesian Definition of risk retrieved on July 1st 2009 from http://www.transfieldservices.com/page/Online_Orientation/Risk/Definition_o f_Risk Monte Carlo simulation retrieved on July15th 2009 from http://www.investorwords.com/3114/Monte_Carlo.html http://www.investopedia.com/articles/07/monte_carlo_intro.asp
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OPERATIONAL RISK MANAGEMENT IN RICE BUSINESS UNIT BUSINESS PROCESS: CASE STUDY ON PT PERTANI (PERSERO)

Electronic copy available at: http://ssrn.com/abstract=1469678

Electronic copy available at: http://ssrn.com/abstract=1469678

By Eric Tofano Bobian 19006042

________________________________________ Dr. Ir. Sudarso Kaderi Wiryono

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Keywords: Operational Risk, Risk Management, Monte Carlo Simulation

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Kata kunci: Resiko Operasional, Manajemen Resiko, Simulasi Monte Carlo

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Bandung, 28th July 2009 Researcher

Eric Tofano Bobian

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Figure 2.1 Operational Risk

Figure 2.2 Risk Management Cycle 12

Identify Risk Exposure

Measure and Estimate Risk Exposure

Find Instruments and Facilities to Shift of Trade Risks

Assess Effects of Exposure

Assess Costs and Benefits of Instruments

Form a Risk Mitigation Strategy: Avoid Transfer Mitigate Keep

Figure 2.3 Risk Management Process (Crouhy, Galai, Mark, 2006: 2)

Risk measurement depends on several

(X + 0.5_) to > X + 1.5_ (X + 1.5_)

Figure 2.4 Risk Simulation Distributions

Figure 2.5 Risk Plotting Matrix

Figure 2.6 Risk Mitigation Matrix

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Figure 3.1 Methodology

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4.1.5 Organization Structure 4.1.5.1 Board of Director

Figure 4.1 PT. Pertani (Persero) Board of Director structure

4.1.5.2 Board of Commissioner

Figure 4.2 PT. Pertani (Persero) Board of Commisioner structure

Figure 4.3 Management Information System flow

Figure 4.4 Procurement Process

4.1.7.2 Production Process

Unholled Rice Sieve

Figure 4.5 Production process

Figure 4.6 Marketing process

4.2.2 Production Process

4.2.3 Marketing Process

Code Probability 1 2 3 4 5 Very low Low Moderate High Very high

Criteria company's operation; the company experiencing insignificant losses.

Very low There is no significant impact to the

Code Probability 1 2 3 4 5 Very low Low Moderate High Very high

Code Severity 1 Very low

Figure 4.7 Histogram of Material substandard risk for probability

=Very low = Low = Moderate = High = Very high

Mean:49.68% Stdev: 28.85%

Figure 4.8 Material substandard for probability classification

Code Probability 1 2 3 4 5 Very low Low Moderate High Very high

Figure 4.9 Histogram of Material substandard risk for severity

(X + 0.5_) to > X + 1.5_ (X + 1.5_)

Figure 4.10 Material substandard risk for severity classification

Code Probability 1 2 3 4 5 Very low Low Moderate High Very high

Criteria flow because the problem can be easily repaired.

Code Probability 1 2 3 4 5 Very low Low Moderate High Very high

Criteria is slight decreasing amount of efficiency in the production process.

Probability = 1/24 = 4.167%