Question

You have been appointed as chief risk officer for global retailer and your responsibilities cover achieving value from risk. After two months in the post you realise that most of the top 2o executives globally tend to see risk management as a low level operational tool, not as a source of strategic benefit. A new CEO has also just started and shares your realisation. Required: Produce a report to the CEO which includes any key assumptions you have made. Specific expertise in retail is not expected. The report should cover two areas. i. Outline key areas where risk management can be more effective if its top executive group does have an appropriate strategic outlook ii. Propose practical steps over a 6 month period which are aimed specifically at the top 30 group of executives and is likely to speed u their understanding of the strategic perspective on risk management

Answer 1

Any business however well planned, can always encounter unexpected problems. However well prepared we may be for unexpected events it is essential that a process be clearly laid out for tackling such events to minimize subsequent losses, tangible or intangible. Any unexpected event or condition that affect the outcome of a project can be termed as a risk. Risks maybe negative or positive, the positive can be termed as an opportunity, however both need to be handled with utmost care, through identification, monitoring and immediate action to control resultant damage. When a project is in the planning stage known risky elements can be handled by avoiding the risk mitigating the risk, transferring the risk or accepting the risk. It is essential to plan ahead for a risk. As a risk is an uncertain and unforeseen incident which greatly impacts the outcome of the activity undertaken, it is essential that a plan be in place on the strategy to be implemented for handling such risk, as the incident maybe sudden and have large impact leaving little scope for immediate reaction or planning.

Risk mitigation plan is meant to minimize the negative impact of the risk or completely eliminate it. The first step in any plan for management of risk is the identification of the risk event. Brainstorming through involvement of every person involved in the business is the best possible way of creating a comprehensive list of various risk that could be encountered during the business plan execution. In the retail business Inventory, logistics, sales, marketing and customer service are the major areas requiring control and management for risk. Involvement of all these departments in identifying the areas of risk and the optimal risk management strategy to be implemented will ensure accurate identification along with efficient implementation in each department, as all involved will be aware of the cause and management strategy. Preparing a risk breakdown structure with each table starting with the heading and proceeding with increasing level of detail can provide a comprehensive reference point for risk management.

Once a risk has been identified every risk needs to be evaluated for the impact it could have on the outcome of the project through analyzing the probability of occurrence and the potential for loss associated with the event. On this basis risk can be subdivided into high impact risk and low impact risk, with maximum focus on critical risks which can derail the entire business. Risk within a business is directly proportional to the complexity of the business process. For example, a business which is largely dependent upon emerging Technology will be exceptionally high risk especially, so under the technology heading the risk grading would be as critical, signifying that this is to be the central focal point during the entire length of the project with constant monitoring.

Considering all our Inventory management and billing systems depend largely on technology, we need to have a back-up plan in case of failures in the systems or breakdowns to minimize damage. Management of obsolete stock is another area to be focused on by creating a cross functional marketing and inventory team linked across global networks to facilitate movement of obsolete stock to locations of its demand. This will also enable utilization of Just in Time inventory system for more cost effective inventory management as inventory can be moved from closest networked locations in times of emergency thereby reducing buffer stock requirements, by maintenance of single buffer stock at a central location serving multiple stores. Risk arising out of damage to inventory must be minimized through insurance. Risk to company image and brand needs to be managed by ensuring quick damage control and addressing customer complaints through replacements or repairs free of cost. Risk from competition, especially e-commerce needs to be mitigated by vertical integration and introduction of delivery services at all possible locations, as well as, providing high quality customer services ensuring customer satisfaction and loyalty. General liability insurance for injuries to customers from occurrences of mishaps at our stores needs to be implemented. Logistics risk management should be highlighted and alternative procurement, transportation and warehousing solutions identified and utilized in case of economic, political or natural events rendering supply from certain vendors unavailable. An extensive analysis by each department shall highlight further areas to be brought under risk management plan.

Once the evaluation plan has been completed the next step in the plan is to identify procedures which will need to be implemented for mitigation of the risk encounter to ensure minimal impact. As mentioned earlier, mitigation of risk can be accomplished through avoidance, sharing, reduction and transfer of risk. Strategic management of risk mitigation approach can show excellent results for elimination as well as reduction of risk. Alternative strategy for transfer of the risk through subsequent transfer of a part of the project to another vendor, sharing of risk by partnering with another vendor who would bring excellent value addition to the business, reducing risk by introducing sufficient funds into the business and avoiding risk by selecting a more reliable vendor instead of a cheaper option.

Contingency plans consists of an alternate business plan for achievement of the goal of the business when a critical risk has defied all control measures. In a similar way contingency funds are one side to side by the business management team in case of occurrence of financial risk related to substantial increase in cost of the business. The organization absolutely neglected and ignored the important aspect of having a contingency plan in place, assuming it unimportant and unnecessary.

Therefore, comprehensive risk management plan goes a long way in ensuring the success of a business by management of any emerging risk, swiftly and efficiently, before any major impact upon the project quality and completion.  A detailed risk management plan for mitigation and elimination of risk helps any process to be completed successfully with minimal risk attached. Risk is the unexpected, and to assume that the unexpected cannot occur, and it is a waste of time preparing for an event which may not occur is an ignorant view. It is practical to have a risk management plan and strategy in place for every business as upon weighing the loss due to investment of resources in preparation of a risk management plan and strategy, against the extensive damage due to an unexpected event, it makes absolute sense to introduce a risk management plan as an essential part of every business. Success needs to be guaranteed, with the advent of globalization no organization can leave its business plans and action to chance, as the losses and damage to brand and company image can have far-reaching impact.

The practical steps for immediate implementation can be listed as under:

• Availing General Insurance for avoidance of extensive damages due to injury to customers on the store premises
• Adequate assessment of the software programs utilized for inventory and billing to minimize risk from data breach and breakdowns. Provision of suitable alternatives in case of such occurrences.
• Creation of cross functional marketing and inventory teams across global stores to monitor large existing stocks of obsolete items and identifying stores where same may be in demand, as this results in major impact on profitability.
• Reduction of buffer inventory by allocation of central buffer stock point for all stores within a certain radius, located at a central warehouse.
• Identification of alternate supply and logistics sources in case of emergencies arising out of political, economic or natural events.
• Provision of exemplary and high level customer service to beat competition, through replace and repair policy, to ensure satisfaction.
• Vertical integration to provide delivery services to mitigate risk from competition from e-Commerce, which is a major emerging risk.