The Role of Risk Management in Operations Management - Research Paper Example

? The role of risk management in operations management al affiliation The role of risk management in operations managementEvery business faces a certain amount of risk in its daily operations and has to deal with the outcomes of such risk, whether positive or negative. The manner in which an organization responds to possible risks could determine whether a business succeeds or fails. Risk management is, therefore, a very important undertaking for any business that seeks to grow and avoid major crises in the future. Essentially, this paper aims to discuss various types of risks, identify the goals of risk management, analyze the risk identification process and finally, discuss the various strategies for managing risk. It is vital to define the term “risk” before embarking on a discussion about managing risk. Generally, risk can be termed as the uncertainty over possible future deviations from the objectives of a given organization. Such deviation may be caused by certain events or circumstances whose consequences may be positive or negative (Hopkin, 2012 pp.14). Simply put, risk is anything that can potentially cause negative or positive effects on the implementation of established business objectives (Longenecker et.al, 2006 pp.463). Since corporate objectives are diverse in nature, there are many types of risks that a business may be forced to tackle. Types of risks There are different types of risks facing an organization, depending on the operations of the specific organization. Nonetheless, the following are a number of general risks that each and every business has to deal with in its normal operations: Hazard risks Hazard risks are the types of risks that only result in negative outcomes for the business. According to Hopkin (2012, pp.15) these are the types of risks that an organization faces during daily operations. Mostly, hazard risks are related to safety and occupational health and are seen to undermine the general objectives of a business in a harmful way, especially to staff members. These may include fires, natural disasters, such as earthquakes, and legal factors, such as theft, fraud, and sexual harassment. Market risks Also known as speculative or opportunity risks, these are the types of risks that a business engages in with the aim of attaining positive results. Such risks are deliberate and the business invests in such risks in order to gain in future. Although opportunity risks are intended to bring about positive results, there is no guarantee that such results will always be positive. Most opportunity risks involve the financial aspects of the business and may entail; invest in equity shares, opening up new branches, producing new products, and moving to new locations (Sadgrove, 2005 pp.211). Control risks There are those types of risks that can be generalized as neither negative nor positive, in terms of the outcomes they give. Such risks give the business a certain level of uncertainty about the future and are mostly associated with the profit a certain project may bring to the business. Hopkin (2012, pp.17) states that an organization is forced to deal with the tentative effects of projected results versus the actual results. For example, an organization may start a project and somewhere in the middle, the project collapses or data and records appertaining to such a project may get lost. Such events bring about negative outcomes, as opposed to what was expected of the project. Risk management Risk management involves identifying and analyzing the possible outcomes of future events to ensure that their impact will be favorable on the business. Accordingly, the impacts of negative events are minimized, while the potential positive events are maximized. In order to ensure the control over risk, any business needs to have clear goals for risk management. Goals of risk management Risk management aims at minimizing operational uncertainties and losses (Steinberg, 2011 pp.75). Risk management aims to protect the business from liability by focusing on the reduction of financial risks and preserving some of the vital components of the business, such as assets, records, data, and physical facilities. Risk management also seeks to maximize business viability through the identification and seizure of opportunities for potential growth. Here, organizations deploy capital with the aim of investing in new products, markets, or technologies that may lead to business growth. Risk management also aims to protect the employees, shareholders, customers, and the general public from any negative effects that may be caused by risk events. According to Graham & Kaye (2006, pp.14) this ensures that the risk of litigation is significantly reduced if people feel that the business has taken all possible steps to prevent them from harm. Once an organization has determined the importance of risk management, it is important to identify specific risks that may hinder operations within the organization. Identifying risks It is of utmost importance for business owners and the management to be able to identify the kinds of risks that the organization faces. According to Longenecker et.al (2006, pp.464), the only way to ensure that no important risks are overlooked is to come up with workable identification techniques, such as checklists, analysis of firm’s operations and financial statements, and the use of questionnaires and stakeholder consultation. Some organizations also use workshops, surveys, tracking of data relating to loss events and key event indicators (Steinberg, 2011 pp.89). The identified risks need to be categorized according to their social, economic, environmental, and political nature. The identification process needs to assess the short, medium, and long-term effects of the identified risks on the business (Reuvid, 2011 pp.12). Follow-up, reporting, and increasing awareness to all members of staff is also essential in completing the identification process. This ensures that everyone in the organization is well conversant with the potential risks that the business might face, thus ensuring proper risk management techniques and strategies (ibid). Generally, risk identification involves identifying risks and threats, appraisal of the susceptibility of key assets, and determination of consequences that such risks and threats may have on the business. Consequently operational management is optimized and the business is able to operate with caution. Managing risks The most effective strategies of managing risk include the use of risk control measures and risk financing. Under risk control, the potential harm to the business is minimized through preventing loss, reducing loss, and avoiding loss that may be caused by negative risk events. Through loss prevention, the business comes up with ways of stopping the loss from taking place (Conrow, 2003 pp.56). For example, an organization may choose to screen its staff members as they go in and out of the premises to ensure they do not steal from the company. Under loss avoidance, the business chooses not to engage in hazardous activities that may lead to loss. For instance, the management within an organization may decide not to open up a branch in a country that is experiencing political instability. As for loss reduction, the business engages in measures to lessen the impact of loss on the business that might be caused by unpredictable negative events (ibid). For example, the organization may have a back-up data storage tool to recover loss of statistics caused by computer malfunctioning. Risk financing is concerned with those losses that cannot be eliminated through risk control. Essentially, risk financing is all about ensuring that funds are available to transfer such risks or to retain them. Risk transfer involves insuring against losses caused by negative risks, or getting outside contractors to perform dangerous operations for which the contactors are insured against (Slack et.al 2010, pp.589). As for risk retention, the organization comes up with strategies for accepting losses; either because the losses are too minimal compared to the cost of insurance or the losses are too huge that no insurance company is willing to cover them. If an organization decides to retain risks, it has to design mechanisms for dealing with disaster, keeping client loyalty, and ensuring good public relations (Longenecker et.al, 2006 pp.467). As Graham and Kaye (2006, pp.4) put it, the correct application of risk management strategies can give a business competitive advantage over its rivals. Most companies today have shifted the role of risk management from the human resource department to the management. The entire management is engaged in identifying and managing negative risks, while maximizing the opportunities presented by positive risks. Fundamentally, risk management is gradually becoming paramount to the process of operational management in any business. References Conrow, E. (2003). Effective Risk Management: Some Keys to Success. New York: AIAA. Graham, J., & Kaye, D. (2006). A Risk Management Approach to Business Continuity: Aligning Business Continuity with Corporate Governance. Brookfield: Rothstein Associates Inc. Hopkin, P. (2012). Fundamentals of Risk Management: Understanding, Evaluating and Implementing Effective Risk Management. Philadelphia: Kogan Page Publishers. Longenecker, J., Moore, C., Palich, L., & Petty, W. (2006). Small Business Management: An Entrepreneurial Emphasis, Volume 1. New York: Cengage Learning. Reuvid, J. (2011). Managing Business Risk: A Practical Guide to Your Business. Philadelphia: Kogan Page Publishers. Sadgrove, K. (2005).The Complete Guide to Business Risk Management. Burlington: Gower Publishing Ltd. Slack, N., Chambers, S., & Johnson, R. (2010). Operations Management (6th Ed.) New Jersey: Prentice Hall. Steinberg, R. (2011). Governance, Risk Management, and Compliance: It Can’t Happen To Us- Avoiding Corporate Disaster While Driving Success. New Jersey: John Wiley & Sons. Read More