Risk Management and Its Importance in Corporate Governance - Coursework Example

Risk Management Strategy Name: Institution: Course: Date: Risk Management Strategy Introduction Risks entail activities and processes whose occurrence change the possibility of something happening according to the existing plan hence affecting the realization of the objectives. This means that risks entail all the possible effects of uncertainty in relation to the realization of organizational objectives (Doherty 2010, p. 14). For companies to experience any form of progress in matters related to growth, development and the realization of goals and objectives, it is the responsibility of the management through corporate boards to develop a set of principles. These principles help to reduce the risks to the company in terms of any possibility of criminal liability, damages of reputation arising from fraud and other corrupt activities. In the context of an organization therefore, the managers in charge of risk management must always consider the possibility of a risk occurring and apply risk management strategy options to ensure the elimination of the modification of the risk for the benefit of the company (Gong 2013, p. 213). The main objective of this study is to assess the relevance of risk management strategy in terms of improving the reputation and performance of a company in relation to the procurement department. This will involve a critical analysis is of the risk management strategy developed by Mattel Company. Risk management and its importance in corporate governance Risk management in the context of an organization entails the process of mitigating or minimizing risks. The success of this process is highly dependent on the ability of an organization to understand its mandate and identify the possible risks that may arise in the process of executing is responsibilities in accordance to the governing principles (Doherty 2010, p. 14). Through effective identification and evaluation of the probable risks, an organization has the responsibility of developing a strategy in term of the resources and the time that will be used in monitoring and minimizing the risks. In most cases risks result from uncertainties in the market especially with regard to demand, supply and the stock market. Furthermore, other uncertainties that often accompany the possibility that a risk will occur include fraud, accidents and natural disasters (Gong 2013, p. 211). When risks occur it is the responsibility of a company to develop a risk prioritization system which allows the organization to identify risks in accordance with those that pose the greatest threat or loss and develop sufficient measures to help mitigate or reduce their effects (FRC 2014, p. 18). In the process of managing risks, the processes that govern the action that an organization will take towers the risk are impact of the risk and the probability of occurrence. For example in a situation where the impact is minor and the possibility that a risk will occur is low, the most appropriate action would be for the organization to accept the risk without developing any forms of intervention (FRC 2014, p. 19). However, in a situation where the possibility of occurrence is high and the impact of the risk is significant in affecting the operations of the company, it is the responsibility of the board to ensure that the management develops effective risk management strategies. Through the development of a prioritization plan it is easier for an organization to ensure that its operations and possible interventions towards a risk are in accordance with the possibility of the risk occurring and the possible effects of the risk on organizational performance and development (Iverson 2013, p. 232). Risk management cycle Other than the typical prioritization plan, most organization develops their risk management strategies in accordance with the risk management cycle. The risk management process, according to the risk management cycle involves acting in accordance with the four steps in the cycle. The first step is risk assessment, which is followed by evaluation of the risk, management of the risk, and the last step involves measuring the impact of the risk. Risk assessment begins with the identification of the risk and the possible effects that it may have on the operations of a company (Gong 2013, p. 212). Activities such as corruption, employee mismanagement and product failure are examples of risks that affect the ability of organizations to realize their objectives. Figure 1.0 Risk management cycle The process of risk identification entails understanding the resource of the risk in most cases, the source is often internal or external to the organization (Knight 2009, p. 45). External sources such as natural disasters may be beyond the ability of the organization to control. However, internals sources such as fraud among employees and the development of inferior products or the provision of inferior services can be controlled within the organization. When such risks are identified, the governing and the management bodies within an organization find it relatively easier to develop certain steps that can help in the management of the risk(s) (Iverson 2013, p. 234). The development and implementation of a risk management plan entail proper assessment of the likelihood of a risk occurring. The management and implementation plan comprises of effective security control mechanisms aimed at mitigating the risk (Lee and Lee 2007, p. 112). Inasmuch as it is the responsibility of the management to ensure the development of strategies and their implementation, the success of any risk management strategy is often dependent on the goodwill of the employees within the organization. In situations where employees in the affected department are unwilling to cooperate with the management towards the mitigation of the risks, it is important for the management to consider them as risks and develop additional strategies on how to mitigate their effect on organizational growth and development (Knight 2009, p. 49). Upon implementation of the plan, the responsibility of the management with guidance from the board to develop monitoring and evaluation processes will facilitate the measurement of progress in the implementation of a risk management strategy. This will involve assessing the level of implementation and the areas that need more resources or input to ensure success in the implementation process (Lee and Lee 2007, p. 113). Despite these measures, a more challenging risk to effective risk management in the context of an organization is existence or a risk that cannot be identified. For instance, a perpetual inefficiency in the production process may facilitate an accumulation of ineffectiveness over time hand this may result in the risk of operational effectiveness affecting (Mathghamhna 2011, p. 5). Importance of risk management in the context of procurement department in an organization Risk management allows an organization to ensure effective corporate governance by identifying challenges that may affect the ability of the organization to realize its objectives and mandate. The procurement department plays an essential role in managing risks considering the prevailing conditions in the modern market. This is because organization in the contemporary society use outsourcing as a strategy that provides substantial advantages to the organization but exposes the suppliers to a myriad of risks (Broder & Tucker 2011, p. 67). Risk management in the procurement department entails the identification of the risk in terms of the intended and the unintended consequences that accompany the risk. Supplier capacity constraints for instance are the most critical risks in the procurement department. This type of risk in requires an assessment of the flexibility in shits of demand that a supplier can afford. This is highly dependent on its sub-suppliers and the operational capacity of the supplier (Broder & Tucker 2011, p. 68). One of the objectives of the procurement department in risk management is to develop strategies that will ensure a reduction of the impact of the risks. The purchasing department can develop and implement risk management strategies by two ways. These include those strategies that can help in the reduction of uncertainties associated with the risk and those that help in the creation of buffers for contrasting the effects of a risk after it has occurred (Turner 2011, p. 111). The latter approach to risk management includes diversification of suppliers and an increase in the levels of inventory. There are often less efforts by the procurement department in different organizations to develop strategies whose aim is to reduce the effects of the strategies. This is due to the development of side effects of improved processes and an improvement in the levels of communication between the department and the suppliers (Turner 2011, p. 114). It is through risk management that the procurement department in an organization is able to ensure effectiveness and efficiency in its operations. This is often through the identification of threats towards organizational effectiveness and the development of the best methodologies towards addressing the underlying challenges. Such organizations realize optimum profits with high-level employee effectiveness and efficiency (Mathghamhna 2011, p. 8). In companies where major supply risks have become a reality, the organization through the procurement department are more likely to ensure the implementation of risk management techniques aimed at improving the existing risk assessment procedures and their contingency plans. These are often caused by sudden in the levels of management. Other essential approaches that procurement department can use in the development of risk management techniques is through effective risk categorization procedures that can be attributed to quantitative indicators to the risks (Broder & Tucker 2011, p. 72). In addition, it is through stakeholder involvement that organizations ensure effective risk management considering that management shares its ideas and strategies with the board, which informs the stakeholder of the proposed interventions. It is in the interest of the organization through its management to ensure that it understand the role of the stakeholders in organizational progress (Sadgrove 2005, p.326). Mattel Company Risk management Strategy Company overview Mattel Company is an American Multinational company, which was founded in 1945. Over the years, the company has grown to become the largest manufacture, designer and marketer of family products and toys in the global market (Mattel Company Inc 2009, p. 4). The company’s portfolio includes the bestselling brands such as the Barbie doll and other entertainment-inspired toy lines. With its headquarters in California, the company operates in 44 countries, employs about 30,000 people, and sells its products in more than 145 countries. The company sells its products through retailers and in some cases such as the American Girl brand, the company sells directly to the consumer through the online market or through its relation stores (Mattel Company Inc 2009, p. 4). Risk management strategy of Mattel Company Since its establishment, the operation of the company has been defined by commitment to corporate responsibility. This has been ensured through the design of polices to ensure that the management and governance operates in accordance with the practices that enhance good ethical behaviour. This is in line with the ongoing corporate responsibility efforts aimed at advancing and communicating the quality of its products, the level of the company’s social compliance and environmental management initiatives (Mattel Company Inc 2009, p. 5). Through these strategies, the company has environed the development of structures and polices aimed at mitigating any forms of risks arising from quality control and matters of environmental management. An additional technique that Mattel Company has been able to employ to ensure a transparency and accountability in addressing matters related to the operations of the company is continuously engaging its procurement department with regard to essential decision-making processes. This limits the possibility of fraud in the identifying the suppliers and in the production of high quality products for its customers (Mattel Company Inc 2009, p. 5). Despite the perceived success of Mattel Company in mitigation of risks, in 2007, the company was faced with a sequential and relatively continuous process of product recalls. This saw the withdrawal of about 20 million toys from the market. Some of the reasons identified for the recall of toys were that they were defective in terms of their designs especially for toys with magnets (Reuvid 2011, p. 119). According to the information gathered from parents and the quality control institutes in different counties these toys were designed with loose magnets which if ingested by the children they would cause health complications. In addition, there were also toys, especially those from Mattel China, that were contaminated with lead paint. Lead painting is considered as heavy and poisonous metal and therefore harmful. The product recall in 2007 was considered as one of the most devastating moments for Mattel Company considering its reputation as one of the bets toy manufacturing company in terms of the production of standardized goods and services are in accordance with the underling health codes (Reuvid 2011, p. 121). Prior to 2007, the success of the procurement department in Mattel was associated with its ability to employ industrial experts especially in China. The company has been operating five of its production company in China for 25 years and therefore it had built a mutual relationship with the Chinese toy manufacturing industry. The company also operates based on outsourcing experts whose role in production is 50%. Furthermore, about 65% of toys by Mattel are produced in China. The relationship between the company and China was essential in the production process and this explains why upon recall the Chinese based firms were blamed for the production of inferior and harmful products to the company. The company experienced about 45% loss in its market value. In addition, the company was also fined $2 million for its violation of the federal lead paint ban (Reuvid 2011, p. 125). In terms of the strategies developed in mitigating the possibility of future risks occurring in the company, Mattel though the procurement department created a Corporate Responsibility Division, which was charged whose main role was to ensure safety measure in the production of its toys. This strategy was in line with the desires of the company to establish a strong market presence and regain its position as the lea dinging designer, producer and marketer of toys on the global platform (Gong 2013, p. 214). An additional risk management strategy adopted by the company was the development of a product integrity policy and beginning of an audit process by the senior management. This was aimed at demonstrating to the public the level of commitment that the company had incorporated to minimize the possibility of such risks in future. In addition, through the audit process, the aim of the company was to ensure that its management understood the source of the problem and could develop possible mitigation strategies (Reuvid 2011, p. 127). An additional risk management strategy in procurement of essential supplies and their sales was the introduction of a three-check safety system, which was aimed at ensuring that all the products of the company were safe for the customers and was in accordance with the standards developed by the Consumer product safety Commission. Such an approach towards products design and production would enhance the ability of the company to provide safe products for its consumers hence rebuilding its damaged reputation (Gong 2013, p. 214). Reasons for failure of the existing risk management strategies Mattel Company operates with the objective of providing the best products to its customers to ensure that it maintains its levels of competitive advantage and profit margin. The 2007 product recall crisis was devastating to the company inters of market share and losses because of the failure by the management to ensure effective adherence to the existing safety standards of producing toys. The success of the procurement department in the company was based on its ability to outsource 50% of the production process. Outsourcing was relatively cheaper but also provided the company with inferior products limiting its ability to maintain its high standards of production (Reuvid 2011, p. 128). The existing risk management strategies by the procurement department only covered the operation of the company’s employees but did not assess the role of the outsourced industrial expert in the production of inferior good. Such levels of negligence contributed to the production of inferior products hence the massive recall in 2007 (Reuvid 2011, p. 125). Mattel’s’ faulty sourcing strategy was also a contributor to the crisis. The Chinese Unit was to be blamed for the crisis because the ownership of the company in China is restricted to Mattel China Group. This group comprises of Chinese based companies whose operations are defined in accordance with the laws of China. External auditors who use Mattel guidelines in production manage the quality control system and they authorized to certify vendors who act in accordance with the regulations of Mattel. These vendors are not subjected to rigours inspection and this may have contributed to the purchase of contaminated and poorly designed products (Reuvid 2011, p. 126). Assessments of the effectiveness of Mattel’s risk management strategy after the recall The formation of a Corporate Responsibility Division was considered an important approach in mitigating future risks because, this division had the responsibility of ensuring that all the operations of the company in all its production and design areas were in accordance with the defining values of company operations. Through the decision, the company also ensured that it reduced the levels of negligence among its managers in terms of validating it suppliers (Gong 2013, p. 216). The three-check safety system in procurement and sales was also an approach that was aimed at ensuring that products of the company were in agreement with the regulations as defined by the Consumer Product Safety Commission. This approach to risk mitigation required an assessment of the products at the design, production and prior to their release to the market. This was to guarantee that the company’s product were safe for the envisioned customers (Reuvid 2011, p. 125). The product integrity policy was a risk management approach developed by Mattel Company. This approach was crucial in ensuring that all the employees in the organization and those outsourced in different counties understood the defining principles in the production of the company’s products. Through such a policy, the company ensured that every employee in the company was in agreement with the policy on production as a way of guaranteeing the safety of its customers (Gong 2013, p. 217) Conclusion Risk management is an essential approach in addressing uncertain activities that may arise in the process of company operations. These activities may be internal or external. Despite the source of risks, it is the responsibility of the procurement department to develop strategies aimed at mitigating risks related to the supply chain. Such approaches control the risk or reducing the possibility of its occurrence. Following the 2007 massive recall of Mattel toys, the company, through its procurement department, saw the disadvantages of outsourcing in relation to the amount of losses and brand tarnishing. The company’s response to this crisis was well handled but it raised concerns in the ability of the company to foresee and manage risks. The suggested security measures on the supply chain network makes it important for Mattel to consider the best possible approaches that it could use in assessing the risk at every level of the supply chain. The risk management strategies were considered beneficial because they provided essential modifications to Mattel’s risk management strategy. Recommendation For Mattel Company to develop effective risk management strategies, it will be necessary for the procurement department to improve on the visibility of its supply network. This will make it easier for the company to ensure effective control of the outsourced expertise especially the sub-vendors and the sub-contractors. Through such visibility, it will also be easier for the company to ensure the development of effective measures aimed at increasing the possibility of producing highly effective products for the target market. The procurement department at Mattel Company should also implement stricter quality control measures throughout its supply chain. This can be realized through the implementation of checkpoints at every level of design and production. The company can also improve on its integrity as the leading supply of high quality products to its target market by this one way. In addition, it also increases the possibility that company vendors will operate according to the expected standards. It is important for the company to implement policies that require thorough risk assessment. The efficiency or effectiveness of such an assessment must be ingrained in the organizational culture of Mattel Company. References Broder, James & Tucker, Gene. 2011. Risk Analysis and Security Survey. Burlington : Elsevier Science Doherty, Neil A. 2010. Integrated risk management techniques and strategies for managing corporate risk. New York, N.Y.: McGraw-Hill. Finacial Reporting Council (FRC). 2014. Guidance on Risk Management, Internal Control and Related Financial and Business Reporting. London Wall: London EC2Y 5AS Gong, Yeming. 2013. Global operations strategy fundamentals and practice. Berlin: Springer, pp. 211-213 http://public.eblib.com/choice/publicfullrecord.aspx?p=1317703. Iverson, David. 2013. 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