Methods to Be Used in Risk Management - Example

Student’s name Course code+name Professor’s name University name City/State Date of submission Hazards and Risk Management Abstract Hazard and risk management can be defined as the process of identifying risk and possible activities which are harmful to the organisation, individuals, government, churches and even society in general to come up with some mitigation measures which can be used to eliminate or reduce the impact they cause to the recipients (Regulatory Reform, 2005). This paper discusses the various types of risk assessment method and management strategies. It also explores different methods of risk management giving example of each. The methods discussed include; SWOT analysis, PESTLE analysis, cost benefit analysis risk ranking using FN diagram, FMEA, PHA or HazOp, common cause analysis, business planning, event diagram, fault tree and lastly reliability block diagram. The essay will also numerate the advantages and disadvantages of each risk analyses method and lastly the paper discuses the budget allocation method to be used in risk management. The first step in the risk assessment is to make a tick list which can be used as a blue print in managing risk. 1.0 Tick list with (Layout) by chief Security Officer Mr. Harrison In risk management it is of great important to make a list of activities which will take place incase of the disaster outbreak. It gives a brief list of the requirements to be used during disaster outbreak. The following is an example of tick list used in risk management and is always a one time activity. Fig.1.0 Tick list table No Activities Tick 1 Asked whether the methodology you want used in risk management is defined 2 Identification of people who are responsible for keeping and maintaining the logs of risk management 3 The project team should be actually aware of the procedures to be used in submitting the risk which might hinders their work towards completing the project 4 The log of risk management should be accessible to all project team members 5 Ensure that all risk management log have been distributed to all stakeholders of the project 6 The relevant data should be sufficient enough for easy understanding of the risk, the probability and the impact of the risk should be well articulated, contingency plans and the mitigation measures to be used. 7 Identify all the relevant risk triggers and should be well documented 8 The risk should be identified in terms of priorities and the possible impact on the After ticking the above information and carefully putting them in place then it is prudence to look for other continuous activities to be checked during risk management process Fig. 1.1 (tick list table) Iterative Activities 1 The log should be reviewed continuously to ensure that the status are up to date 2 Continuous review and updating the list of potential risk 3 Log should be up to date 4 Risk prioritization Changahwal Godown Layout Fire exit gate There are several methods used in risk assessment and management process both in business and in real life situation. This includes:- 1.1 SWOT Analysis at Village Changahwal Godown (strength, weaknesses, opportunity and threats) In order to carry out proper risk management, it is in order to do proper scanning and organisation audit listing its strength, weaknesses, opportunities and threats of the organization, this internal examination of the organization is very important as it gives the management the opportunities to prepare for any eventuality which might arise along the process of running the business (De Brouwer, 2009). a. Strength This is the unique capability which an organization is having and is not being found in any other organization or its potential competitors. Examples include; Competent team of expert who can handle all types of risk ranging from fire outbreak to landslides. This is distinctive and unique which can only be found in our organization. Accessibility of the area, the place is very spacious and can be easily accessible within all directions Powerful equipments and risk management tools which are efficient Proper management structure which is less bureaucratic to allow easy and faster response in case of disaster outbreak In risk management the company needs to perfect its strength so that it can maximize income out of it (Taylor and Francis, 2002) b. Weaknesses These are the shortcomings of the organisation which makes it not to compete effectively in the industry Examples include; Some of the equipments used within the godown are outdated which is a major drawback to our organization Few disaster respond team which can not cover the whole area Weaknesses are risk threats which can make the company’s operations stop working. The company needs to analyse its weaknesses and put safety precaution like frequent servicing of the machines, repair to minimize the failure in the production process (Taylor and Francis, 2002). c. Opportunities Opportunities are unexploited prospect which the organisation can venture into and make profit out of it (Richard et al., 2008). It can also act as the safety modes through which the company can spread the risk hence reducing the overall impact which the company is receiving from occurrence of the hazard (Richard et al.). Examples include; Wide unexploited market which we can use to expand our customer base Oversees market which we can expand into Low cost of raw materials According to Cheetam and Chivers (2005) opportunities like availability of wider market for product is very important in risk reduction in case of fall in sales of a company product. The company can either decide to expand its market base to counteract any fall in sales due to decrease in demand in one particular market. d. Threats These are potential dangers which the company is exposed to and can lead to the closer of the business or organization and Mr. Harrison should consider this option (Regulatory Reform, 2005) Examples include; Stiff competition from international competitors Price war which makes us to lower prices hence low profits recorded. Depletion of raw materials Whenever the organization has identified some of the potential threats, the management should move swiftly to avert their occurrence. In case of threats from new entrants into the market, the management can use price war strategy where they lower the prices which will make their competitors to make losses throughout hence quitting the market as they become the monopolies in their area of operation (Richard et al, 2008). This risk management strategy work very well with companies which are new in their area of operation (Taylor and Francis, 2002). Another way of risk aversion is through patent registration which will guide the ownership of the innovation from other parties. The SWOT analysis can be implemented in the building as follows. The location of the house should be strategic to its intended purpose so that in can catch the attention of the targeted market, example a building which is intended for housing people should be located away from industrial area due to pollution hence it will have the necessary attraction to the customers hence reducing the risk of avoidance by the customers. The threats of price changes and cost of raw materials should be considered. In opportunities should be used in addressing the risk as some of the opportunity would be the increase in the population hence future opportunity in the housing sector. Urban sectors provide more opportunity in the future than rural areas; also the government policies also influence the investment decision in the housing sector. 1.3. Risk ranking (with FN-diagram) This is another method of risk analysis which involve ranking of risk in order of their magnitude and probability of its occurrence (Taylor and Francis, 2002). Suppose within the godown the following are the risk experienced during it’s of the warehouse which Mr. Harrison should implement Fig. 2.0: FN-diagram Event Risk Magnitude Probability Hazards 1 24 0.04 600 2 45 0.4 112.5 3 12 0.2 60 4 34 0.06 566 5 18 0.01 1800 6 20 0.09 222 7 22 0.2 110 Since risk is given by hazard multiply by probability, the graph of hazard vs. probability will give us FN diagram as follow FN diagram Probability Unsafe areas Safe areas Hazards Fig 3.0 y- axis represents probability while x- axis represents the risk or hazards. In evaluating risk, the acceptability level of the risk arises in the safety discussion criteria, the reference line in the FN diagram should be used in evaluating risk. This is very useful more so in system analysis. The probabilities should be used in given the order of priorities if it comes to risk measures to be used, the one which is the most probable should be dealt with in descending order. In the application of the FN diagram, the contractor can use it in determining the probability of the risk of a construction process hence helping the in determining and controlling the occurrence of the risk. Example, using the FN diagram the constructor can calculate the probability of the cost of the construction materials increases before finishing the construction process hence the contractor can calculate with a lot of certainty cost $ probability out come Risk 20000 0.09 1800 18200 12000 0.01 120 11880 4000 0.2 800 3200 3000 0.5 1500 1500 2000 0.1 200 1800 10000 0.1 1000 9000 Other risk which can be analyzed in the industry scenario includes; Mechanical break up The mechanical failure can result due to the following factors; corrosion induced by spilt chemicals into the machines parts hence causing breakdown, fatigue failure on the machines after working for several hours without rest, thermal induced and also fretting induced. This risk can be mitigated through ensuring that machines are working according to the recommended hours and prescription Failure mode due to electricity This can result if there is either lower voltage or overvoltage entering into the system. It can be controlled by either ensuring voltage control system which regulates the amount of power entering into the system. Shortage circuit failure which occurs incase of sot from the power and can cause fire outbreak, all the measure needs to be taken into consideration to ensure proper control of power shortages. Open circuit failure which can happen when there is some break up in the power lines and it can cause loss of power output. This should be maintained through proper maintenance of the factory systems. Other failure includes; Failure by the employees to follow the prescribed procedures while carrying out their daily activities which can lead to accident even explosion within the factory. Failure to control the operation of the machine as prescribed time limit can even cause the machine to burst (Taylor and Francis, 2002). PHA After the expert assessment of the risk, the next step involves conducting PHA which involves several steps in the global viewing of the all projects in question. The following steps are involves. Data acquisition This stage gives out the overall plan, regulation and procedures to be followed in the process of hazard break out. Incase of fire out break, the fire extinguishers are strategically located to ensure that any person can easily excess them. The data will be collected through direct interview of the experts, libraries and other past case studies. Identification of all possible hazards which might arise in the process of the manufacturing; in our case they include, flammable gases which should be properly closed and to a void contact with fire. Corrosive chemicals should be well handle to avoid damage. People working in the factory should take care of all the above possible hazards which might take place within the factory causing a lot of damages Hazard table No Source Location Trigger Accident Warn Safe Cont’ Frequency Critique Recommendation 1 boiler Factory Spill out Gas poisoning - not none 1 3 Gas detector and proper sealing of gas cylinders. 2 Power factory Power loss Fire outbreak none none - 2 1 Power back up Fig.4.0 1.4 Fault tree Fault tree is another risk analysis method used by project managers, Fault tree simply break the risk into its contributing components then breaking it down into tree like presentations. The risk presentation is represented into its components. The was fire leakage in the factory yesterday There are rules and regulation governing factory operation More than two people cannot work in the factory room No Yes No Power used in the factory is from generator No Fig.5.0 From the above table one can come up with the following outcome Question a Question b Reward Fire Leakage No Operation Rules Yes Power People No Factory Work No Fig.5.1 A B Reward “C” 1 1 1 1 0 0 0 0 1 0 0 1 Fig.5.2 Incase “A” and “B” are the same then we can say that AB = C In a ven diagram it can also be presented as follows; shaded area shows the intersection 1.6 Common cause analysis Common cause analysis are important in risk analysis, the failures from common cause can greatly undermine both quantitative and qualitative safety analysis within the organization. The common methods used in carrying out common cause analysis include; ZHA which focuses on the proximity of the risk to the exposed threat (Dent et al., 2008), secondly particular risk which concentrate specifically on one specific problem and given technologies used in the risk management. Other areas of concerned include the procedures and methodologies used in the routine maintenance of the factory machines and manufacturing premises. Common cause analysis also looked at the major areas for the system and major engineering concern areas and the technology used in the design. Common cause analysis is very new in the area of risk analysis and has the prospect of being in demand in future (Stickler and Ozog, 2002). The most important thing to note is that common cause analyses combine all other methods of analysis synthesizes into one analysis of the all system. The analysis looked at the technological design and mechanical design of the system to avert any risk which may arise due to both mechanical and technological failure. 1.7 Reliability block diagram In most cases reliability block diagram are used in evaluating the system reliability and availability of each individual elements. In reliability, mean time to failure is calculated to help in estimating the failure time (Moreno et al., 2012). The mean time between failures is also calculated and the mean time to repair is also calculated. If these items are known and can be calculated and are not, then it can be easier for the maintenance work to be carried out to avert risk associated by system failure hence inconveniencing the production process in the company. Reliability test is very helpful especially in circumstances where the factory maintenance is involve because one can accurately estimate the failure time interval of the system. The reliability diagram used in the construction process for chemical manufacturing factory is as follows; A B C The risk analysis starts at the point of building construction where if it is a factory then the sewerage system should be well constructed to allow free movement of water in and water out without any blockage as any kind of blockage might cause hazard within the factory premises. 1.8 Event tree These are analytical diagram logically examining the event as they flow from the first event to the last event (Catalao et al., 2012). The event trees are logical evaluating process which works on the principal of tracing forward in time to a model of risk analysis. It will go back to the cause of the problem unlike fault tree. Example There was a component failure in the chemical manufacturing process, the machine stopped working accidentally without prior notice hence the factory activities came to a halt. The cause of the machine failure should be looked at from the origin, what causes it, what affect what caused the failure and how can it be resolved (Taylor and Francis, 2002). The machine failed due to mechanical break up caused by lack of services and fatigue. Possible causes also include: Worn parts of the machines could not perform The machine was overworked The machine operators might have not followed the rules and regulations used in running the machines Lack of service to the machine Power shortage Possible solution Replacing the worn out part Ensuring that machines woks within the recommended time limit Servicing the machine Power back ups Event tree The figure above explained the logical sequence of preventing the next risk of failure in the operation system of the factory. After the first break down of the machine, the parts need to be replaced, fixing power back up, then instructing the machine operators to follow the rules and regulation after that servicing the machine. (Munoz et al. 2009) 1.9 Cost Benefit analysis In cost benefit analysis the risk is evaluated in monetary terms as cost of undertaking a particular project verses the profit of doing the same project (Ahmed et al., 2003). Investing in government bonds what are the benefits of investing or not investing in the government bonds. Cost benefit analysis is one of the most common methods used in evaluating the riskiness of the venture and the benefits associated with it; if the benefits are more than the risk then the project is worth investing into (De Brouwer, 2009). In a company, the safety of employees is one of the most important security issues which need to be considered and not only the return on the investment (Project Management Institute, 2008). The environmental impact of the proposed project is also very crucial. Example; take two employees working at a manufacturing plant, one employees is at power voltage of 40,000mw, while the other is at 20,000mw, the one at 40,000 is at a higher risk stake than the one using voltage of 20,000 though both might have safety equipment. The four square box explains the whole scenario Table for probability Likely hood Severity Low High High Chemical leakage Low Falling of airplane Bad weather The steps involve in doing cost benefit analysis includes; Identification of the project to be undertaken three projects A, B and C Group identification of the project Indentify cost and benefits for each group of the alternative project Quantify the cost and benefits then start qualifying them and disqualifying them step by step Factor in other economic changes like inflation, devaluation of money and any other factors involve (Aibinu and Jagboro 2002). 2.0 Utility function Worldwide, there is a lot of trade which takes place within individual themselves and countries at large; this is majorly driven by human needs which are endless and are never satisfy. The utility function is used in analyzing the nature of human wants The law of demand states that, the demand of a commodity increases with decrease in price. According to Taylor and Francis (2002), that is there is inverse relationship between demand and price. If price decreases many people can afford the commodity and people will shift their attention on buying it, but the risk involve here is that high demand will make goods to run out of supply hence demand will be in excess forcing prices to push up. There is need to balance the demand and supply so that the price of the commodity are properly balance in the market. (Project Management Institute, 2008). Law of supply states that supply of commodities increases with increase in price (Krugman, 1987); that is there is direct relationship between supply and price. The risk involve with this law is that if the supply of commodities are not controlled, the supply might be in excess forcing the suppliers to reduce the prices. There is need to always control the supply of goods so that the prices are maintained. Graphically the above information can be represented as follows Fig.6.0 Y-axis Demand P Eq Supply Q--- X-axis Eq – is the equilibrium point Q- Quantity in units X-axis P- Price in $ - Y axis At equilibrium price and quantity, the market forces are at rest and are the perfect point for all the markets. At this point all goods produced and supplied are at clearance point and there is no excess and shortage of the goods produced. Pricing We need to price the commodities accordingly which does not allow high prices, some safety need to be taken in consideration when setting up prices. This can be done through reducing the chain supply used in distribution of goods and services and specialising in huge production process which can help in economies of scale Supply In supply, some precaution measures need to be taken such that unhealthy practices like hording should be not practiced among suppliers of goods which can create artificial shortage hence increasing price unnecessarily. Risk of destabilizing price equilibrium needs to be controlled either through price control measures. Government should also take measures in controlling supply shortage by creating buffer stock which can be used during shortage in supply to meet the demand of goods. Price control can be done either through subsidies of the production cost to producers hence they can sell their product at reasonable price without incurring losses and without charging high prices and this will help in maintaining market equilibrium. In order to avoid equilibrium risk, the government should know and calculate the following: Benefit cost ration which is given by benefit to the public divided by cost to the government which means if ration is one and above then government will be forced to undertake it for the public interest purposes. Net present value compared with future value of the risk. 2.1 Business continue Planning Planning can be defined as the process of arranging for future activities within the organization. In business plans can either be in financial terms or expressed in terms of objectives and the visions of the company. Business plans expressed in monetary terms are called budgets and they include: Master budgets Financial budgets Operational budgets In planning the business owners give the estimated projection and objectives which they need to meet by the end of trading period, after actual trading the company records actual cost and income which has been incurred through the trading period. The actual activities are being compared with the projections which were planned in the budget. The management analyses through comparison of the planned budget and the actual budget giving out variance which occurs. The variance can either be positive or negative in which case the management looked at the factors which could have contributed to the variation and acting in them. Profit and loss accounts also highlighted the major risk involve in the company financial management process and the ways in which the company can minimizes the cash outflow from the business while increasing cash inflow. The budgets are one of the most important planning and risk assessment tool used by most of the business organisation. In plans the business should also define their marketing objectives, targeted market and methodologies used in approaching the market. The business should use this also to evaluate the risk involve in the propose venture like competitors’, legal policies and political environment and policies. 2.2 Advantages and disadvantages of different risk management’s methods SWOT Analysis Advantages It gives management opportunity to identify opportunities which they can explore It also gives organization opportunity to explore and know there strength It is simple and easy to do It is less time consuming Disadvantages Does not give the magnitude of the risk involve? It does not rank the risk in order of priorities It does not give or predict the frequency of risk occurring PESTLE Analysis Advantages It is simple and easy to carry out It gives the management opportunity to identify some external risks which are beyond the control of the business It helps in identifying the possible areas prone to risk hence business can avoid such area It is less expensive as it involve direct observation Disadvantages Fails to asses the magnitude of the risk to the business Does not give the frequency of the occurrence of the risk Fails to rank the risk in order of priorities Risk ranking (with FN-diagram) Advantages It gives the risk in order of their priorities It is more specific with the kind of the risk which might affect the business Disadvantages Expensive compared with SWOT and pestle analysis Not easy to understand Time consuming FMEA, PHA or HazOp Advantages It gives the magnitude of the risk which can affect the business It gives the frequency of the risk occurrence More accurate, scientific and specific Disadvantages Assumes the environmental risk but only concentrate on the risk from within Is very narrow and focuses only in one specific area Fault tree Advantages Easy to understand Less cost effective compared to FMEA Disadvantages Difficult to construct and draw Does not rank the risk in their order of priorities Common cause analysis Advantages More detailed compared to fault tree and SWOT analysis Gives the magnitude and possibility of risk occurring It is more specific Disadvantages Very expensive Needs an expert to carry out Cost Benefit analysis Advantages Is more detailed and accurate compared to other methods of risk analysis It give the actual cost incurred incase of the risk occurring It helps in comparing different methods of investment and also helps to identify one which is less risky Disadvantages Very expensive to carry out It needs an expert to carry it out Difficult to understand Utility function Easy and simple to interpret Less expensive More elaborative Disadvantages Does not give varieties or different options to chose from Does not rank risk in order of priorities 2.3 How you would allocate a fixed budget to respond to the risks as assessed Depending with the type and kind of risk the organization is experiencing, the necessary budget allocation is required to respond to the risk and hazards which might affect the organisation. The allocation will be done as a percentage of the total budget in relation to the magnitude of the risk experienced. (Project Management Institute, 2008) Changahwal Budget estimation of the risk Management for godown   Budget   Item Cost Fire Extinguisher $ 8,000.00 water Tanks $ 5,990.00 safe Jackets $ 4,000.00 cloves $ 200.00 Specialized Staff $ 40,000.00 Support Staff $ 3,000.00 Training Cost $ 2,000.00 Miscellaneous $ 1,000.00 Total Cost $ 64,190.00 Budget allocation Equipments 40% Staff 10% Training of the staff 15% Remuneration of staff 30% Emergency 5% References Ahmed, S.M., Azhar S., Kappagntula P. and Gollapudil D. (2003). Delays in construction: a brief study of the Florida construction industry. Proceedings of the 39th Annual ASC Conference, Clemson University, Clemson, SC, pp. 257-66. Aibinu, A.A. and Jagboro G.O. (2002). The effects of construction delays on project delivery in Nigerian construction industry. 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