Operation management final

OPM3 Risk ManagementGroup presentation

Building manufacturing plants in emerging countries

1) What is the problem? To expand our business in the global market, building manufacturing plants in emerging countries is inevitable activity. However, many Japanese companies face lots of critical issues in every foreign manufacturing plant. The causes of those issues are varied and many of them are uncertain and unpredictable.

2) Why do I want to make the risk analysis for the problem? If we can conduct risk analysis for the projects, we can prepare for them in advance to some extent. What’s more, we can determine which country/area should be selected for a certain project with the results of the risk analyses.

3) How do you use the results? After arranging the HHM modeling chart, we will generate a quantitative risk analysis model. Then, we will be able to conduct MC simulation to predict the probability of the critical incidents and prioritize possible alternatives.

Problem definition

Approaches

1. Make a master list of risks• What is the risk

for building manufacturing plants in emerging countries

• Through discussions and desk research we clarified possible risks

2. Develop HHM• Categorize

all of risks into several segments, that is, develop the HHM

3. Apply RFRM to extract key risks• Identifying,

ranking, and finding critical risks are essential

• Apply RFRM for them

4. Quantify risks by utilizing Monte Carlo simulation• To judge the

investment, quantifying risks is the only way

Master list Risks for building manufacturing plants in

emerging countries?

Some countries policy and regulation are often changed!

Some areas have geographical difficulties to develop

Terrorists possibly come to risks Accounting standard is difference with my

company There is not still enough infrastructure It is difficult to find the good partnerships It is hard to collect the good work force on site Procurement delay often happens in some

regions We do not still understand some countries’

market We cannot easily connect to Internet in some

areas

Discussion in the team

Desk research on investment in

emerging countries

Review of third-party analyses

Interview to colleagues in

foreign division

Politics

Tax (Tariff)

Law/Regulation

Infrastructure

Public safety

Weather

Natural Disasters

Pandemic

Terrorist attack

Accounting standard

Interest rate

Tax standard

Financial report

Auditor/Consultant

Local bank

Accounting staff

Exchange rate

Currency devaluation

Suppliers

Environmental

Forwarder

Business ethics

Equipment

Sustainability

Stakeholders

Insurance company

Utilities

Local technical support

Religion

IT systems

Labor

Network

Delivery

Payment

Software

Data loss

Brainstorming

Hierarchical-Holographic-Model(1st level)

Hierarchical-Holographic-Model(2nd level - 1)

Risk Scenario-1• Local government changes.• A coup erupts.• New regulation is installed.• Corporate tax increase.• Tariff increase. • Flood is caused by typhoon, or hurricane.• Snowstorm hits.• Drought occurs.• Electricity is not sufficient. • Water supply is poor. • Roads are not well developed. • Light crimes like thieves, pick pockets may disturb life. • Guerrilla is active. • Pandemic breaks out.• Earthquakes happen. • Mountain, bush fires .• There is fear of terrorist attack.• Local operation is damaged by protesters.• Different nationalities of employees may cause dispute.

• Different religious shows different custom at work place

Risk Scenario-2• Government political

• Regulation change• Tax policy Change• Weather change• Electricity Shortage• Water Shortage

• Tarrif Policy Change• Public Safety• Pandemic and Infectious Disease Outbreak• Natural Disasters: Fire, Flooding, Bushfires• Terrorist attack/ Bomb threat etc.• Infrastructures are well developed• Nationality of the employees

Risk Scenario-3

• Accounting standard diffrences

• Tax standard differences• No trustworthy Auditor/consultant• Exchange rate fluctuation• Currency Devaluation• Credit control

• Financial reporting requirements not understood• Accounting staff availability• Relationship with local Bank• Interest rate• Affordable labor cost• Affordable Fixed cost(Land, building, leasing etc)

Risk Scenario-4• Availability of Suppliers who can supply high quality materials

• Availability of Forwarders who can deliver/ship the goods with high frequency• Highly educated Employees are available• Availability of Equipment manufactures and its service staff.• Insurance company are available• Availability of Utilities(Water, Electricity, Gas Housing, Hospital, school, etc).

• Availability of Infrastructures(Airport, SeaPort, Highway, customer, Supplier)• Availabity of low cost, high quality Labor• Tender evaluation requirements not defined• Overpayment for goods and services• Failure to comply with procurement legislation/ processes

• Conflicts of interest in tender award process• Failure/ closure of service provider• Unethical service provider actions

• Goods/ services not meeting quality requirements

• Non-delivery of goods and services by supplier• Breach of contract

Risk Scenario-5

• Changes in services provided• Loss of customers to private sector companies• Services/ goods not provided within budget• Change in ability to supply services/ goods• Change in public demand for services/ products• Loss of customers to other state organisation• Change in interest rates• Undefined or unclear strategic vision• Inaccurate forecasting• Unethical business practices• Incomplete or inaccurate resource planning• Poor organizational design/ Inappropriate reporting lines• Strategic plan not implemented• Business Continuity Planning inadequate/ BCP not developed• Stakeholders not identified• Poor/ deteriorating stakeholder relationship

Risk Scenario-6• Expectations of stakeholders not understood• Poor community relationships• Negative/ hostile/ inaccurate press coverage• Ineffective communication strategy/ plans• Joint ventures/ partnerships not managed• Loss of customer loyalty/ revenue• Failure to meet sustainability targets• Failure to assess and understand environmental impact of organizational

activities• Contamination of water supply• Damage to/ development of protected sensitive natural habitats

Risk Scenario-7

• Poor local technical support available

• Inadequate system security/ Confidential information not adequately protected

• IT systems not integrated

• Network unavailability

• IT system/ software obsolescence• Poor choice of software/ IT solution/ IT solution does not support

business requirements

• Loss of data/ information

RRF: Risk-Ranking and Filtering method(Selected 11 critical risk scenarios)

1. Poor IT security causes serious confidential information leakage.2. Immature organizational leads to low quality products.3. Local parts supplier cannot meet quality requirement.4. Local maintenance company cannot provide timely support.5. Change of local government causes unfavorable economic

effects.6. Poor infrastructure disturbs smooth operation of factory.7. Terrorist attack.8. Anti-Japan sentiment erupts around the region,

and leads to serious damage.9. Low job retention rate causes unstable operation.10.High salary increasing rate to keep retention rate.11.Severe natural disasters, Earthquake/Flood/Hurricane,

cause long downtime.

i. Undetectability• Can we predict the risk?• Can we detect the risk?

ii. Uncontrollability• Any monitoring method of unfavorable

conditions?• Can we stop the risk immediately?

iii.Multiple paths to failure• Many paths to the risk? Unpredictable paths

exist?• Standardized path exists?

iv.Irreversibility• How probable the occurrence of critical risk?• How severe the risk mess up?

5-grade evaluation for each criterion considering both proxy attributes

RRF: Risk-Ranking and Filtering method(Evaluation criteria, Proxy attribute)

If we can predict and detect the risk 1

If we cannot predict and detect the risk 5

Extracting 4 critical risk scenarios

5. Change of local government causes unfavorable economic effects.7. Terrorist attack.8. Anti-Japan sentiment erupts around the region, and leads to serious damage.11. Severe natural disasters, Earthquake/Flood/Hurricane, cause long downtime.

Weighting factor investigation by AHP

Weight of each evaluation criteria

i. Undetectability :0.263

ii. Uncontrollability :0.118

iii. Multiple paths to failure:0.055

iv. Irreversibility :0.564

Quantitative ranking of critical risks

5. Change of local government causes unfavorable economic effects.

4×0.263 + 4×0.118 + 5×0.055 + 3×0.564 = 3.4917. Terrorist attack.

5×0.263 + 4×0.118 + 5×0.055 + 4×0.564 = 4.3188. Anti-Japan sentiment erupts around the region, and leads to

serious damage.4×0.263 + 4×0.118 + 4×0.055 + 5×0.564 = 4.564

11. Severe natural disasters, Earthquake/Flood/Hurricane, cause long downtime.

4×0.263 + 5×0.118 + 4×0.055 + 5×0.564 = 4.682

Order of Risk scenario : #11 > #8 > #7 > #5

Risk assessment by MC

1,000 MJPY

2,000 MJPY

5,000 MJPY

10,000 MJPY

Total damage [MJPY] =A

B

C

D

PDF of each risk was defined as triangular function by the following table.

Monte Carlo simulation

Operation management final

Business

Transcript of Operation management final