Posts Tagged ‘New Ways’

Risk management defined

December 12th, 2009

In the extremely volatile financial environment of today, risk management focuses on matters of insurance and is concerned with identifying potential risks, which may have a severe impact on a firm. Firms conduct risk management assessments in an effort to identify new ways of protecting their assets against sharp market fluctuations.

Originally, risk management was related to the acquisition of the proper insurance, which was offered in standardized forms, basically eliminating the need of risk management. Insurance was purchased to cover the cost incurred by fire, theft and liability losses. Over time, globalization and the increased volatility of financial markets has given birth to a great variety of risks, which can adversely affect organizations. This changed the concept of risk management radically, making it increasingly important.

Modern organizations use risk management as a common practice, particularly for any operation, which is related to financial or facilities management. However, risk management is not focused only on financial risks, but on a multitude of risks that may pose potential threats for a firm. In particular, some of the risks, which need to be alleviated or managed by risk management, are:

Financial risks: they are related to financial transactions. For example, if the organization plans to issue new bonds, it faces the risk of an increase in the interest rates before the bonds are brought to the market. Demand risks: they are related to the demand for the firm’s products or services. Given that sales profitability is particularly important for a firm’s viability, demand risks are very critical for the firm. Speculative risks: they are related to the speculations a firm makes in regards to potential gains from investment projects or marketable securities. Speculative risks are particularity important because they may incur gains and losses to the same extent. Liability risks: they are related to liabilities associated to the firm’s products, services or employees. For example, improper driving of corporate vehicles may incur huge costs for the firm. Property risks: they are related to the destruction of production assets from floods, fire and so on. Personnel risks: they are related to employee’s actions such as fraud, embezzlement, sex assaults and so on. Environmental risks: they are related to polluting the environment, an issue that has acquired increased public awareness and sensitivity in the last years.

Generally, liability, property, personnel and environmental risks are insurable risks, meaning they can be covered by insurance. However, in order to decide if a specific risk will be insured, managers need to evaluate all optimal alternatives. This is a major function of risk management, which facilitates the undertaking of optimal risk measures.

Organizations recurrently undertake a comprehensive assessment of potential risks, at least twice a year. The assessment is being performed by a corporate team comprising of staff members representing all the major functions of the organization.

A complete risk management assessment involves the following stages:

(a)    Identifying the risks

At this stage, risk managers identify the potential risks that may be a threat to the firm. It is important to understand, that risks should not be categorized only by how the industry insurance views them. Each firm performs different activities and undertakes different types of risk. On the other hand, insurance coverage includes a tiny set of risks that modern firms face. Therefore, risk managers should apply a holistic view of risk management to pursue effectively their business objectives. Such a holistic view encompasses risks, which are related to:

Business partners (interdependency risk, cultural conflict risk) Competition (market share, price war, industrial espionage) Customers (product liability, credit risk, lack of customer support) Distribution channels (transportation, service availability, cost) Financial operations (foreign exchange, interest rates, stock market) Operating activities (facilities, natural hazards) Human Capital (employees, independent contractors, training) Political conditions (war, terrorism, intellectual property rights) Regulatory & Legislative settings (antitrust, exporting licensing) Corporate reputation (corporate image, branding success) Strategic management (mergers & acquisitions, joint ventures, corporate agility) Technological issues ( complexity, obsolescence, virus attacks, hackers)

(b)   Measuring the potential effect of each risk

There are risks that are tiny and are not really posing any threat to the organization, while others may greatly impact organizational viability. Risk managers should be able to segregate risks by measuring their potential effect and then focus on the most serious threats.

(c)    Deciding on the appropriate handling of each risk

In most situations, risk exposure is anticipated and reduced by the use of several techniques. These involve, but are not limited to the following:

Transferring the risk to an insurance company: Depending on the nature of the risk, it may be to the firm’s best interest to transfer the risk to an insurance company and pay a premium for it. However, there are cases that self-insurance is less costly for the firm, which prefers to bear the risk directly instead of paying another party to bear it. Transferring the risk to a third party: This technique applies mainly to manufacturing firms that may undergo liabilities as a result of problems in their transportation fleet for example, which would have a huge impact on transferring the products from the manufacturing plant to various points across the country. In this case, the firm may contract with a trucking company to undertake the shipping, thus passing the risk to a third party. Purchasing derivatives contracts to reduce the risk: Firms use derivatives to hedge risks. For example, financial derivatives can be used to reduce risks that arise from interest rates and exchange rates changes. Reducing or eliminating the probability of occurrence of an uncertain event: The losses incurred by an adverse event are a function of the probability of occurrence and the dollar loss if the event occurs. In some instances, risk managers may reduce the probability of occurrence by taking appropriate risk measures. For example, to anticipate the demolition of property by fire, the firm may use fire-resistant materials in areas with the greatest fire potential. In other cases, a firm may discontinue a product or a service line if the risks associated outweigh the returns.


By: Christina Pomoni

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Concepts of Waste Management

September 3rd, 2009

Dealing with waste management has become an issue of major importance. Some things, like landfills, are becoming increasingly full. This creates a situation in which we are forced to find new ways to dispose of waste. This said; let’s explore some of the concepts of waste management.

- Some interest groups seem to oppose any new development anywhere. It can seem as though their goal is to avoid all new developments. In the UK, these groups are commonly referred to as BANANA, which means Build Absolutely Nothing Anywhere Near Anything. By contrast, NIMBY means Not In My Back Yard. These groups do not oppose development projects as a whole. They only disagree with certain ones that they feel are inappropriate for their particular neighbourhood.

- Great Britain has come up with a way of managing waste called the BPEO, which stands for Best Practical Environmental Option. The BPEO essentially looks at a project and determines the best course of action. They look at the implications to the environment in the short term and the long term. They are dedicated to minimizing environmental impact and maximizing benefits.

- EPR, or Extended Producer Responsibility, is the concept that producers must incorporate the cost of disposing or reusing a product once it has served its purpose. A company who manufactures these things must ultimately take care of the waste it generates. The company can do this alone, or outsource it to a PRO, a Producer Responsibility Organization.

- Linguistic Detoxification is an environmental term used to describe a process in which the level of toxicity is downgraded by assigning it a different term through legislation. The naming of this phrase is credited to Barry Commoner, an environmental activist.

- Some places have taken the Pay As You Throw approach. Consumers are charged a fee based on the amount of municipal solid waste they turn in at the collection site. Normally, recyclable materials are accepted free of charge. PAYT is also known as variable rate pricing or unit pricing.

- The Polluter Pays Principle basically means that the person or entity producing the waste product is fiscally responsible for the damage done to the natural environment. This is also known as Extended Polluter Responsibility. The government seeks to put the responsibility for disposal onto the producer, hopefully providing incentive for them to improve the recycling ability of their products.

- There is a moral and political principle called the precautionary principle. This principle states that if harm to the public might occur, then if there is no scientific consensus that states that harm will not occur, the responsibility for the result falls on the advocates. In regards to the environment, this principle is most often applied to the release of toxins.

- Product stewardship is a concept that says that everyone involved in the product is responsible for its disposal after its useful life. The manufacturer must plan for and even pay for the disposal of the product. The consumer must recycle or properly dispose of the product. Everyone takes a part to minimize environmental impact.

- Waste Hierarchy is talking about the “three Rs”, and classifies waste management approaches based on their desirability. These are reduce, reuse, and recycle. Basically the goal is to get the most use out of a product and to generate the least amount of waste.

- The Zero Waste concept essentially promotes the idea that the current recycling procedures be enhanced to create a circular pattern in which the most use is obtained from a product. The goal is to create zero waste by reusing a product as many times as possible.




By: Derek Both

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