Risk management policy is referred to as a strict decision, measure and process employed by companies to protect management, employees and its assets against any unforeseen occurrence in terms of risk and hazards (wikipedia 2010). Risk is referred to as probability of something going erroneous; danger, injury, damage or losses that may occur on the other hand, is anything that has an impact in the accomplishment of an organization’s goals, vision, mission and objectives.
While hazard is the probability of something occurring i.e. danger or injuries, it is an exposure that has the tendency of turning into loss. Consequently, several companies in every field production and services ranging from, manufacturing, agriculture, hospitality, health, information technology, education, management, oil and gas e.t.c. have to put in place, risk management policies in accordance with health and safety acts such as the United States Federal Fair Labour Standard Act of 1950 and that of the Parliament of the United Kingdom Health and Safety Act of 1974 to ensure the safety of their employees (Wikipedia 2010).
If properly examined, the above mentioned acts connote that an organization should be willing to accept the risk related to its operations. Hence the willingness of such organization to acknowledge risk associated to its activities or objectives is generally referred to as Risk Appetite. While the ability of a company to identify, access and develop strategies to deal with threat(s) facing the organization activities is referred to as Risk Management (Tait n.d). One of the processes of risk management is risk assessments with is often done in two major ways:
a) Quantitative risk assessment involves the computation components of risk R, the magnitude of the probable loss, L and probability p of the occurrence of loss. Mathematically expressed as
a. Ri = Lip(Li)
b. Rtotal = ? RI = Lip (Li) (Olaotan 2006).
b) Qualitative risk assessment entails the measurement of risk associated to an actual situation and an acknowledged hazard.
Neste Oil a case study; an organization which bases its business operations on oil refining based in Espoo, Singapore (nesteoil 2009). The identification of risk related to an organization meticulously depends on the type of operation carried out by the organization. Neste oil has a list of risk factor that relates to its organizational operation examples of such risk are listed as follow:
ü changes in refining industry margins
ü increases in global refining and conversion capacity relative to demand
ü significant or extended changes in demand and supply fundamentals for crude oil and other feedstock and for refined petroleum products
ü domestic and international competition
ü failure to protect its proprietary technology
ü an interruption to production at either of its two wholly-owned refineries
ü problems or delays in accessing raw materials at competitive prices
ü the implementation of bio-fuel legislation in the European Union
ü problems or delays in completing the NExBTL renewable diesel investments or failure to capture the anticipated benefits from these investments
ü labour disruptions that could interfere with its operations
ü exchange rate fluctuations
ü uncertainty in the global financial markets trading activities may result in losses
ü increased capacity in the shipping industry
ü maritime disasters
ü Neste Oil is not insured against all potential losses
ü operations and investments in certain countries which may be exposed to economic disruption inherent to such countries compliance with, and changes in, environmental laws
ü introduction and implementation of competing renewable fuel technologies or hybrid and electric engines
ü Neste Oil may become subject to significant liability related to MTBE (Methyl Tert-Butyl Ether)
ü Military strikes or sustained military campaigns or terrorist activity in the areas or regions where Neste oil has operations (nesteoil 2009).
The Organisation should mapped strategies on how to assess risk based on:
The priority and probability of occurrences that is the likelihood of risk(s) to take place.
The impact of the risk on the organization’s business activities and ability to detect such risk.
The table below is used to illustrate a sample of how organization prioritize and assess risk:
Threatens the feasibility of the business
After impact realization
Threatens the attainment of business and strictly reduces productivity profit
Realization at the occurrence of event
Reduce achievement and productivity rate
Realization preceding occurrence of event; can be alleviated prior to occurrence if examined
No impact on productivity, but may increase production expenses and timeframe
Determined well in advance of occurrence or trigger event
The organization considered risk quantification as one of its important task thereby quantify their business risk, this step helps the organization in its decision making process throughout it functional key area such as operations, marketing, finance and other important area where decisions are to be taking. By quantifying business risk, the management of an organization is able to put into operation a proper risk management guide and efficiently assess and prioritize their risk and dispense their resources properly (Sadgrove 2005).
Doing this, the organization need to plan how much fund is needed and stipulate what is needed with respect to cash flow in order to meet up with the organization’s financial requirements. To further illustrate this, let say the company need to generate $200,000 monthly for them to me their financial requirements, the management is required to carefully map out their operational plans and quantify their financial risk as well as quantify market risk where they will explicitly state the impact of the organization’s revenue and profit if they lose their market share (i.e. the percentage of sales the organization has in the market within a specific period) to other companies as much as quantify the overall risk of demand in the organization’s market space due to economic rationales.
Furthermore, Neste oil was able to identify risk associated to their business and made a sketch out of this risk(s) as listed in third paragraph. By so doing they accounted for varieties of risk connected to their business which include; political risk, sovereign risk, exchanged rate risk, economic risk, market risk, systematic risk, financial risk, business risk e.t.c (ehow 2010)
Quantifying all these risk by stipulating figure on each of them will help the management of the organization plan and implement a risk management policy and put in place an adversity recovery plan.
Due to the nature of business operation of Neste Oil wish basically is refining of crude oil and marketing of the final product to several consumer around the world to forester their business operations the company adopt the use of derivative measures to protect the cost of their investment against instability in price, commodity and currency exchange rate that can devastate proceeds therefore they employ the use of forward contract a type of derivative that involve an obligation to trade a specific item at a specified cost agreed at a future time (Watkins 2008). To illustrate this if the company will been in need of say £5,000,000 (Five Million British Pounds) in the next 6month in order to avoid exposure to exchange rate risk the company takes a forward contract for the pounds from a financial institution in the UK now, this contract takes nothing or little from both parties conversely the organization might decide to go to a standardized market for forward contract, this market is known to be the future market, the future market eradicate the ties between company and its counter-part including the risk that the other party might not execute the contract (Redhead1996).
Risk management is the key to organization success, any company that is willing to be successful in its business proceeds should put in place a good risk management policy and this policy should be strictly adhered to, simply because having the policy in place help the organization foresee risks and minimize or totally eradicate them before any damage is caused.
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