Risk Management Model for a Food Processing Plant Dealing - Essay Example

Risk Management Model for ABC Foods Limited Customer Inserts His/Her Name Customer Inserts Grade Course Customer Inserts Tutor’s Name 24, 10, 2011 Introduction ABC Foods Limited being a food processing plant dealing with canned food products and fresh juices is faced with several risks that challenge its cause of business. A risk for ABC Foods refers to any future unfavourable events, actions or disasters that may result in a loss, harm or any form of liabilities to the company. Risk is based on probabilities and vulnerability assessment that unfavourable event may occur. Even though businesses operate in uncertain environments especially with regards to the future profitability, it is imperative that investors are given assurances that the existing risks facing them are within their allowed limits through the process of risk assessment and management. Risk and risk management Risk is a potential loss, harm or damage to organisation resources. Organisational risks which ABC Foods is vulnerable to includes; Strategic decision making risks, operational, external risks, internal, physical and financial risks (McLaney, 2009). Risk therefore are everywhere in the business processes and need not be financial as always insinuated but its effects are negative to the intentions and objectives of ABC Foods Limited. Risks can also be categorised based on the nature of the causing situation and its effects on ABC Foods limited as follows; a) Natural hazards including; Floods, climate changes, emissions, and pollution b) Crime c) Health and safety d) Political factors like; legislations, standards, protocols, taxation policies and acceptable practises e) Economic factors like; Inflation, market growth, competition, Risks can be deliberately be contained by organisation management through process of risk assessment and management (Peirson, 2008). Risk management therefore is a deliberate process aimed at containing risks in an organisation within acceptable levels, transferring the risk to other responsible bodies that can adequately handle it like insurance agencies or completely eradicating them through relevant mitigation measures. According to Frumkin et al (2006), risk management is a process unlike the occurrence of the risk therefore the dynamic nature of risks cannot be a solved through a static off-shelf solution. This makes risk management process a critical process which has to be intertwined within the organisation operational and management processes (Atrill, 2008). Risk management process Risks and hazards management process is an organisation-wide deliberations aimed are eradicating, minimizing or controlling risk. This can be done through policy documentation or operational activities but its main objectives are as follows; Balance sheet protection Financial risks are mainly renowned for causing liabilities that extend to affecting financial stability of the organisation. In order to avoid liabilities that will cause erosion of capital, risk management comes in handy. Clear reporting process Modern enterprises like ABC Foods are mainly managed and driven by knowledge management which involves proper capture and reporting of incidences and status of the organisation at different times. Risk management planning and incidence recording is a key to organization reporting. Business continuity Risk management entails protection of the going concern of an enterprise. Without measures that ensure the business continuity, organisation should not make financial reports as a going concern rather it should wind up since its future is not guaranteed. The development of business continuity and disaster recovery plans are inherent in risk management making it one of the key deliverables (Crouhy, Mark, & Galai, 2000). With regards to IT assets and service provision necessary risk controls should include procedures that will guarantee IT service provision and also recovery during downtimes. Reputation management Reputation risk is a risk of high consequence and can affect the business of ABC foods; this therefore ABC Foods should always endeavour to maintain good public relations with the community, clients and service providers (Lim, 2007). Have a bad reputation especially when dealing with food processing is extremely detrimental. It is therefore imperative that a risk management plan should include solutions and plans that will always uphold a good relation to the public. Risk management Risk management therefore is a holistic endeavour supported by intimate understanding of the organisation objectives and corporate goals and equal understanding the challenges and risks inherent in the business of the organisation (Helfert, 2001). Risk management with regards to ABC Foods is viewed as one of the critical pillars supporting the achievement of business goals. In order to ensure that the strategic goals of ABC have been achieved a risk management team comprising of the Chief Executive Officer (CEO), Officer Manager, Operations manager, staff representative, Union representative, and the marketing manager (Correia, 2008). This are operational staff that at all times sit and agree on the risk management approach to be taken by the organisation based on the various risks and hazards in which ABC Foods is vulnerable. Based on their nature of their work and perceptions of risk, different members of the team have varied perceptions on probability of occurrence of risks but all is harmonised into one organisational document. Risk management constitutes the assessment of the causes of various risks facing ABC Foods and the assets to be affected. It the ultimate goal of risk management to change uncertainty into business benefits that are tangible by limiting and constraining threats and capitalizing on the same opportunities. Causes of risks Human causes like; crime, negligence and mismanagement Poor control environment Change Natural causes Size and complexity Political divisiveness Risk management strategies Risk management strategies are tactical and strategic plans aimed at tackling risks and uncertainty events in ABC Foods. Risk management involves the identification of potential risks, assessment and quantification in terms of their degree or probability of occurrence and finally weighting on their effects on the business of ABC Foods. Risk management strategies include; a) Accepting the risk Accepting the risk is a hands free approach where the risks are assumed to be non-existent especially where their likelihood and consequence are very low. This is applicable where the risk management team is of the opinion that the risk is manageable with the available resources (Kochis, 2006). b) Mitigation or risk treatment This approach involves institution of measures to curb risks and recovery measures where the risks are acceptable. It is applicable all risks but preparedness on the side of the organization is paramount through the mitigation and treatment (Ericson, 2005). c) Risk avoidance Risks are as a result of some threats or organisation activities and therefore this strategy aims at halting the risks causing tendencies within the organisation. d) Risk transfer This is one of the major strategies that organisations keen on division of labour and specialisation adheres to so that intuitions like insurance can have risk management as their core business while ABC Foods concentrates on Food production. The consequences of risks are transferred to a third party whenever it occurs. e) Risk sharing Risk sharing involves entering into agreements with third parties so that whenever there are risks incidences the consequences are shared in a predetermined formula. f) Taking the opportunity Some risks are inherent in the nature of business and investors always agree to absorb those risks where returns are involved. This strategy involves agreeing to suffer the consequences of a risk and at the same time ready to take on the benefits surrounding it. Risk management decision making model for ABC Foods The above attributes of ABC Foods risk management model borrowed from Gray and Larson Model needs to be modified by the inclusion of risk management objectives so that the risk management teams will always have guiding deliverables while undertaking the risk management activities (Gray & Larson, 2006). To further make the model more effective; at each phase of the model, there is continuous identification of new risk which is further forwarded in a loop like format to the first stage of the model. Below is ABC Foods’ Risk model; Risks management decisions for ABC Foods Limited There are several risk management models which have been put forward by various experts as a remedy as propositions to handling risk in organisations. For ABC Foods and being a vulnerable food processing corporate entity, it is recommended that the approach they have to take in order to cushion the going concern and the shareholders returns from risk should be involving, holistic and strategic. It should be able to approach risks as potential for ABC Foods collapse and therefore all departments should participate in risk management as part of their responsibilities. The model proposed for ABC Foods is borrowed from Gray and Larson Model which promotes a structured and gradual process for risk management teams in an organisation. The following steps are to be undertaken for ABC Foods Limited as per the model; 1. Risk identification This is one of the most critical processes of risk management since it leads to the realisation of the risks and hazards which ABC Foods is vulnerable to. In the case a Risk management team For ABC Foods identified the following as risks which it faces; RISK TYPE CATEGORY Fraud Internal Stock Financial External Stock Goods Receiving Goods Dispatch Theft Internal Petty Cash Office Stock Services Burglary External Break & entry Office Stock Services Assault Internal Spouse Staff External Customers General On duty Loss of IT Service Internal Network loss Virus Power External Attack Fire Arson Electrical Flood Act of God Being a food processing and marketing plant, ABC Foods has enlisted assets that are considered very critical and vulnerable to risk and it includes the following; HVAC UPS AC Server AC Fire system Access Control EWIS accessories IT Server UPS CCTV All these are assets whose functioning is very critical to the business of ABC Foods. Failure of one of them would amount to Poor or no service at all consequently making them critical and therefore should be protected from any malfunction or incidents that can results in their failure. Threat and criticality assessment Threat assessment incorporates calculation of the likelihood of a given risk occurring on a given asset. Threats are potential occurrences or events that may hinder achievement of organisation goals and objectives as defined by Fabozzi & Peterson (2003). Threat assessments involves measures of intent of the threats and their capacity to cause harm in the organisation hence making threat assessment a matter of risk analysis in the context of organisation and its assets. Threat analysis in most cases involves security risks where external forces pose risk threats to ABC Foods. Threats are therefore the external potential of risks with reference with an organisation context. Threat Assessment based on police Statistics Year-to-date OFFENCE Total Clearance Rate % Actual Incidents Probability of occurrence Capacity On ABC Foods Murder 1 100.0 1.0 0.0 Low Attempted Murder 4 100.0 4.0 0.0 Low Manslaughter 1 200.0 2.0 0.0 Low Driving Causing Death 2 100.0 2.0 0.0 Low Aggravated Sexual Assault 124 128.2 159.0 0.4 Low Non-Aggrav Sexual Assault 145 98.6 143.0 0.4 Low Aggravated Assault 294 83.3 244.9 0.7 Low Non-Aggravated Assault 808 85.1 687.6 1.9 Low Assault Police Officer 45 100.0 45.0 0.1 Low Threatening Behavior 252 77.4 195.0 0.5 Low Deprivation/Liberty 34 82.4 28.0 0.1 Low Aggravated Robbery (Firearm) 10 20.0 2.0 0.0 Low Aggravated Robbery (Other) 67 46.3 31.0 0.1 Low Non-Aggravated Robbery 83 36.1 30.0 0.1 Low Total Offences/Person 1870 84.2 1574.5 4.3 High Burglary (Dwelling) 3470 12.4 430.3 1.2 Low Burglary (Non-Dwelling) 2075 11.2 232.4 0.6 Low Steal Motorized Vehicle 836 24.8 207.3 0.6 Low Steal Other Vehicle 148 20.3 30.0 0.1 Low Theft 7093 17.8 1262.6 3.5 High Receiving/Illegal Use 31 125.8 39.0 0.1 Low Fraud 528 66.9 353.2 1.0 Low Arson 106 19.8 21.0 0.1 Low Graffiti 551 10 55.1 0.2 Low Property Damage 2746 19.3 530.0 1.5 Low Total Property Offences 17584 18.0 3165.1 8.7 High Breach of Restraint 234 93.2 218.1 0.6 Low Drugs (Traffic) 118 96.6 114.0 0.3 Low Drugs (Possess) 979 86.9 850.8 2.3 Low Total Other Offences 1331 88.9 1183.3 3.2 High Total All Offences 20785 90.9 28.5     From the above analysis Fraud, theft, stealing and other property offences pose much threat as compared to personal offences consequently indicating that ABC Foods is vulnerable to it. The calculation of the probability of occurrence is a measure the number of incidences against 365 days of the year. The incidences recorded are based on clearance rate. Criticality Assessment No. Level 1 Cost Value Replacement Criticality Level 2 Cost Replacement Criticality 100-1-1 HVAC 76300 35000 109500 2 100-1-1-1 Compressor 1 5000 12000 5 100-1-1-2 Compressor 2 5000 12000 5 100-1-1-3 Boiler 19000 26000 5 100-1-1-4 Humidifiers 6000 8500 5 100-1-1-5 Controller 5500 7900 5 100-1-1-6 Condenser Tower 35000 42000 5 100-1-1-7 Pump 1 400 550 5 100-1-1-8 Pump 2 400 550 5 100-1-1-9 UPS AC 15000 9000 18000 5 Split AC 5400 6000 100-1-1-10 SERVER AC 15000 9000 18000 5 Split AC 5400 6000 200-1-1 Fire System 34100 12800 45820 4 FIP 3400 5000 200-1-1-1 Detectors 3000 4000 4 200-1-1-2 Pump 1 250 500 4 200-1-1-3 Pump 2 250 500 4 200-1-1-4 Tank 12000 15000 4 200-1-1-5 Valve 1 180 240 3 200-1-1-6 Valve 2 180 240 3 200-1-1-7 Valve 3 180 240 3 200-1-1-8 Smoke Vents 9000 13000 3 200-1-1-9 Extinguishers Water 3700 4300 2 200-1-1-10 Extinguishers Carbon 1200 1600 2 200-1-1-11 Hose Reel 1 380 600 2 200-1-1-12 Hose Reel 2 380 600 2 300-1-1 Access Control 18500 13400 20500 3 ACS 300-1-1-1 Controller 2400 2400 3 300-1-1-2 PC 3800 3200 5 300-1-1-3 Power Supply Unit 400 600 2 300-1-1-4 Door 1 2000 2400 3 300-1-1-5 Door 2 2000 2400 3 300-1-1-6 Door 3 2000 2400 3 300-1-1-7 Door 4 2000 2400 3 300-1-1-8 Door 5 2000 2400 3 300-1-1-9 Controller 2 1900 2300 3 400-1-1 EWIS 14800 7000 18400 4 EWIS 400-1-1-1 Master Panel 3200 4500 2 400-1-1-2 Slave panel 2100 2400 3 400-1-1-3 Control Point 1 1900 2300 3 400-1-1-4 Control Point 2 1900 2300 3 400-1-1-5 Control Point 3 1900 2300 3 400-1-1-6 Control Point 4 1900 2300 3 400-1-1-7 Control Point 4 1900 2300 3 500-1-1 IT Server 20000 9000 16000 5 800-1-1 UPS 14000 6000 19600 5 800-1-1-1 Battery Bank 1 3000 4300 3 800-1-1-2 Battery Bank 2 3000 4300 3 800-1-1-3 Battery Bank 3 3000 4300 3 800-1-1-4 Inverter 5000 6700 1 900-1-1 CCTV 13540 9325 15600 2 CCTV 900-1-1-1 Switcher 900 940 4 900-1-1-2 VCR 1 1200 1300 5 900-1-1-3 VCR 2 1200 1300 5 900-1-1-4 PSU 340 410 4 900-1-1-5 Monitor 1 450 575 5 900-1-1-6 Monitor 2 450 575 5 900-1-1-7 Camera 1 1800 2100 4 900-1-1-8 Camera 2 1800 2100 5 900-1-1-9 Camera 3 1800 2100 5 900-1-1-10 Camera 4 1800 2100 5 900-1-1-11 Camera 5 1800 2100 5 Note: Criticality (consequence) taken from AS/NZS4360:1999 Appendix E 2. Risk Assessment Risk assessment involves getting the quantitative and qualitative information on risk. This process is very crucial since it provide foundational understanding on the nature of risks, assets affected, cost implications and the probability of the risks occurring (Brigham & Ehrhardt, 2008). Assessment of risk therefore will determine the various approaches to controlling them consequently dictating the various risk management strategies to be applied. Where the probability of occurrence is high and the consequences or the effects of the risk incidence in very costly, it will be imperative that proper control and mitigation measures must be instituted. In the case of ABC Foods the following analysis table will provide details on the various risk assessment based on team members averages; ABC FOODS RISK TYPE CATEGORY Likelihood Consequence Fraud Internal Stock D 3 Financial D 4 External Stock E 2 Goods Receiving E 2 Goods Dispatch E 3 Theft Internal Petty Cash C 2 Office D 1 Stock B 2 Services C 2 Burglary External Break & entry C 2 Office D 3 Stock B 2 Services D 3 Assault Internal Spouse D 4 Staff E 4 External Customers E 4 General D 4 On duty C 5 Loss of IT Service Internal Network loss B 4 Virus C 4 Power E 2 External Attack E 3 Fire Arson U 4 Electrical E 4 Flood Act of God U 4 From the analysis assessment summary based on the various likelihood and consequence opinions by the team members, it is clear that the perception about risk from the raw assessment data vary with individual team members work schedule. From the summary the risk consequence parameter has been taken as an average from all the team members’ suggestion while that of the likelihood has been taken from the opinion of a more neutral officer of the team. Without clear identification of the likelihood and consequence parameters; risk assessment will fail in its quest therefore it is a very critical parameter used to make risk management decisions (Tipon et al, 2001). 3. Risk response development This is a process represents the initial conception of the risk management strategy and therefore depends much on the risk assessment and further analysis of risk in order to develop a refined risk mitigation and control plan ( Bob et al, 2001). This is therefore the actual solution planning that will deter the deteriorating effects of risks to ABC Foods. Risk response development is founded on thorough analysis of risk in order to establish the sufficiency and relevance of the existing risk controls in handling a given threat, prioritising and ranging of risk in order of the organisation tolerance limits and their consequence and finally enable clear understanding of the risk intensity and vulnerability of the various assets of ABC Foods. Risk response development therefore is an initiation process to risk treatment. 4. Risk response control This is the actual institution and commissioning of the risk control and treatment systems and resources of the organisations (McLaney, 2009). It involves assessment and final conclusion of the risk management team as to the appropriate solution to a given risk. It is therefore based much on a proposed risk management plan proposals that have been put forward as possible remedies being sieved and an appropriate one or combination is selected and implemented by the team. There are other treatment or control options which may be chosen by the risk management team and this may include; Risk reduction where controls are introduced that targets to minimize the vulnerabilities of the ABC Foods assets to risk and consequently the risk volume. Risk avoidance controls involving the checking and abstaining from the activities and causes of risks Risk sharing where the vulnerability to risk is shared or extended partly to a third party therefore reducing the organisations vulnerability. Risk transfer controls involves wholly transferring the vulnerably to a third party mostly an insurance firm. The risk management cost incurred here relates to premium only but the consequence is wholly transferred especially where the consequence to ABC Foods is severe. A risk tolerance control involves assumptions that the involved risks are highly unlikely and with minimal consequences where the resource required mitigating are materially insignificant. Recommendation for ABC Foods With the main challenge facing ABC Foods being fraud it is imperative that all its vulnerable assets like stock, finances, raw materials and finished goods proper corporate governance systems should be instituted around this vulnerable assets movements. It is also recommended that other assets controlling and facilitating protection of this assets like computers and the communication networks are not subject to manipulation. This means that necessary physical and management controls should be enhanced for the organisation. Risk communication and reporting Risk management does not end with controls only but rather a continuous process that requires communication and constant review (Helfert, 2001). In order for ABC Foods to keep abreast with their risks management environment where risk incidence always evolve especially with regards to frauds and other security related concerns, it is imperative that the management documents their strategies and also record the various risk incidences they have faced. This is going to provide a knowledge source for tackling future risk and hazards. According to Koppenjan & Klijn (2004), risk incidence recording also helps in developing a reliable business continuity and disaster control plans which are key deliverables of a risk management strategy. Conclusion Every risk management framework should always endeavour to establish the operation procedures and plans that will ensure that the attainments of the organisation goals are achieved. Further, the framework should have deliberate goals and zealous team behind it so as to provide the necessary impetus for progress. 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