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Managing Risk, Developing a Resilient Business

The world is a dangerous place, even for the established businesses. Something might happen even to the best on the market and at the most inappropriate moment. But, by reading the following, you’ll be better equipped to react and you’ll be better prepared for all those unlikely events that usually ruin a business if badly managed.

Catastrophic events happen

Your supplier might face problems so serious that you might be out of materials and not able to produce for a while. It happened to Ericsson and Nokia in 2000. Or, something might go wrong exactly when your perfect production system helped you outperform your competition. It happened to Toyota in 2009.

They faced one of the most difficult chapters of its storied existence when it issued not one but two recalls for unintended acceleration problems. The company’s stock took a 20% hit in the weeks following the first reports of the problem writing down the companies value by an estimated $35 billion

Being prepared for potential troubles matters

Nokia quickly implemented its crisis plan to acquire more production capacity from other factories and to enlist additional chip producers to show up the loss of supply. They even reengineer the design of some of their phone models to function with different ships chips that were readily available.

As a result, their market share jumped from 25% the 30% in the immediate aftermath. Erickson on the other hand, let more than two weeks pass before reacting to the fire. They lost $570 million in that quarter, and over $2.3 billion for the year and the company was forever weakened, until it could not survive on the market and was acquired by Sony.

Bad days in supply chains ruin businesses

Risks are found in situations with uncertain outcomes and, given the rate of change occurring in the world today, our businesses are laden with uncertainty . A Georgia Tech Study from 2000 shows that, on average, the typical firm stock price dropped by just over 10% when the world learned of a bad day in the company’s business or supply chain.

The ramifications of a bad day could be greater for smaller businesses, that likely would not have the resources to write out a rough patch or the ability to make demands on suppliers or even customers for help in weathering such a storm. But, you be on the winning side of such a perilous situation or at least dampen the effects of a potentially devastating circumstance.

Understand risks and manage them

To know and understand your risks you can conduct a 360° scan of your organization and its environment, and for this you can use a simple tool known as SWOT Analysis – where S stands for strengths W for weaknesses oh for opportunities and T for threats. Strengths and weaknesses are assessments of the internal condition of the organization meanwhile the O and T opportunities and threats are external to the company.

The problem here is accepting that things go wrong and changing. People are not so willing to change even in face of death as so many studies on patients with potentially deadly diseases show, and this applies to companies. Yet, as former General Electric CEO, Jack Welch, points out “if the rate of change outside your organization exceeds the rate of change inside the end is near”.

Keep it simple and be consistent

To aid in this recognition of symptoms before they become big problems many companies today employ a tool called Failure Mode and Effects Analysis known by the acronym FMEA.  This method has gained widespread adoption in recent years by companies embracing operational excellence methods like Lean and Six Sigma but, it might simply be too complicated for you.

A simple subjective scoring system when evaluating three attributes probability, severity and detectability –  is sufficient. A simple one to 10 for each criterion a risk priority number or RPN is the composite of the three scores for each dimension. The objective is not to achieve 100% accuracy in this assessment but the shine light on the risk factors that are or should be keeping us up at night.

Use a supply map to understand your supply chain risks

Risks are plenty and, when you consider the supply chain network in which your organization resides when assessing opportunities and threats in light of this network orientation, it is highly recommended to map this supply network on a whiteboard, on paper or using a drawing software just as you do to analyze your company’s internal processes.

Once you have the map set up before you step back and take a look at what’s there.  Who are your most critical suppliers and most valuable customers? Where are you most dependent in your relationships or even overly dependent? Also, ask yourself who could shut down your business by failing to deliver.  Where you have difficulty mapping critical supplies and customers it illuminates a need for understanding and possibly greater controls.

Managing risk in operations

When you brainstorm about your own company’s risk you may discover that some of them are interdependent. You might find, for instance, that by eliminating one risk you elevate or introduce another. The common example is managing the risk of disappointing customers by holding large inventories that come with a high cost.

Of course we want to eliminate risk when possible. However the name of the game in risk management is usually to offset an unacceptable risk with a more acceptable. It’s like paying an insurance premium. You’re willing to pay a small amount on a regular basis to offset a catastrophe of something bad were to happen.

Developing a resilient business

Other steps can be taken within the four walls of your organization to make it more agile and resilient:

  • you can implement information technologies that make you aware of internal and external circumstances calling for your attention,
  • you should also establish a high level of communication across departments and functions to facilitate information sharing, and
  • you can also cross train your employees to take on different roles and tasks so they’re aware of each other’s parties and they can fill in for each other in a case of crisis.

Effective operations management, a checklist

Identifying and managing risk is vital to building agile resilient businesses but, really, so are all of the elements of business operations. So, this is what you need to do:

  • find the most efficient way to create the product or offer the service that you want to provide your customers,
  • plan your company’s overall strategy with the input of both the supply and demand sides of the organization
  • figure out the optimal size and method for replenishing your inventory,
  • determine who your profitable customers are and ensure their loyalty,
  • eliminate waste from your processes in pursuit of perfection to yield the greatest possible value,
  • measure your operational performance to improvement without losing time measuring the wrong things,
  • strengthen your supply chain making your most important suppliers and customers part of your team,
  • minimize risk and create contingency plans to reduce vulnerabilities.