Risk Management Manual for Creation of New Products - Term Paper Example

W p Topic: Risk Management Manual for creationg of New Products at Procter and Gamble Company. Name: Qingqing Zhu ID: 1611719 Date: Table of Contents List of illustrations. 2 Crouhy, M., Galai D., & Mark, D. (2006). The Essentials of Risk Management. McGraw-Hill companies. 28 Culp, C. (2001).The Risk Management Process: Business Strategy and Tactics. New avenue: John Wiley and sons’ ltd. 28 Fragnière, E. & Sullivan, G. (2007).Risk Management: Safeguarding Company Assets. Boston: Thomson learning. 28 Frenkel, M., Hommel, U. & Rudolf M. (2002). Risk Management: Challenge and Opportunity. Heidelberg: Springer. 28 Haslett V. (2010).Risk Management: Foundations for a Changing Financial World. Hoboken: John Wiley and sons’ ltd. 28 List of illustrations. Executive Summary Manufacturing industries are currently facing different forms of risks in their operations. They are faced with financial risks, market risks, and economical risks. Multi national companies are currently facing great threat due to market volatility and global market uncertainties. Procter and gamble company has had advanced ways of dealing with market uncertainties’ like starting production units in different countries as opposed to distributing from one single unit. For a new product development it is necessary for the company to identify, assess. Evaluate and mitigate potential risks to have effective success in their product development. The paper addresses on risk management and the mitigation measures required in eliminating the potential risks possible, associated with new product creation especially in Procter and Gamble Company. It will analyze how the company will identify potential risks associated with its new venture through risk management process and assessing and analyzing the risk potential using the risk assessment techniques. 1.0 Introduction Procter and Gamble is an American multinational company which manufactures broad range of consumer products. The company has been inexistence since 1837. It is a multinational company operating globally with more than 30 product brands. The company has a customer base of over 5000million customers in over 140 countries. In 2011 it recorded a sale of 82.6billion Dollars making the company to rank position five on the most admirable companies in the world. P&G has it’s headquarter in united states of America at Cincinnati with marketing and sales channels in Australia, china, Europe, Africa, Asia, northern America, India and Latin America. The company has been striving fully in achieving the customers’ needs globally by establishing proper communication in administering their needs. The company works by the philosophy of thinking globally and working locally. The company has recently been striving in achieving the brand equities, innovating in new products as well as using strategic techniques in achieving their goal of being a global leader. P&G has remained to be very competitive throughout the world; though globalization creates complexity and uncertainty in business. The company deals with production of the daily individual consuming products and other products involving food, pharmaceuticals, detergents, soap products, paper product and beauty products. Recently the company has established production units in different countries which enhance the way the company diversifies its risks as different countries have different laws and regulations in business operations. Manual’s Purpose: The purpose of the manual is to provide the necessary guidelines in creation of a new beauty product in Procter and Gamble Company based on the risk analysis and identification and assessment of the product viability (Crouhy, Galai & Mark, 2001). It will also give standards necessary for risk management when innovating or introducing new product to the market. This will be necessary for the project managers as they will be in a position to manage future risks effectively with use of the manual in reducing risks associated with new product creation. 2.0 Importance of risk management. Risk management involves thinking systematically on all possible disasters, risks and problems prior their happening and setting up ways necessary in reducing its impact or ways of coping up with the impact. It is a sequential process which involves risk identification, analysis of risk as well as evaluation and risk monitoring (Crouhy, Galai & Mark, 2001). It includes risk assessment and identifying the correct remedy that could be used to effectively minimize the negative impact related to the risk in product development or in any form of innovation (Crouhy, Galai & Mark, 2001). In addition to that it also entails evaluation of the risk level to identify which necessitates the choice and individual makes. Risk management is very crucial when undertaking new product development. To begin with through risk management the potential investor identifies any form of problems associated with a certain project. It becomes very easy for the managers to pinpoint issues related to each phase of product development. To add on that it enhances proper identification of risks, it is very difficult for one to mitigate risks which have not been identified. It enhances identification of risk probability and impact each probability have on business performance (Crouhy, Galai & Mark, 2001). On top of that risk management helps in identification of the risks associated with new venture either financial risk, market risks, political risks, health risks and environmental risks giving clarification for the events and importance for tackling risks which the new venture might face. Through risk evaluation and identification of the required measures makes it possible for the company to reduce the likelihood for the risk occurrence (Crouhy, Galai & Mark, 2001). As a result it increases the chance for the new product penetrating through in the market. Lastly risk management will enhance quality decision making in regard to resource allocation as well as creating higher performing project which could improve the stakeholder’s confidence. 3.0 Risk Management Roadmap Risk management road map of P&G Company aims at providing a structured approach to risk management and description of necessary actions which needs to be taken in each identified phase (Crouhy, Galai & Mark, 2001). The road map will show all the required decisions necessary when carrying out the risk management process. Different processes are used in risk management which are parallel or sometimes overlap each other. The invention of new beauty product in the Procter and gamble company has enhanced the need for the risk management. Product viability should therefore be guaranteed in this stage as the risk management team should identify product initiation and the impacts it should have to the society. The organization will instill the risk management culture to all its staffs to enhance understandings of the risk management ways. Those involved in risk management will be given the correct training to enhance better understanding of the product requirements as well as the company’s main goal of inventing the product (Hillson, 2003). The next step involves tailoring the risk management practice. Hillson, (2003) claims that risk tailoring involves identifying the organization success criteria, which entails identification of the organization objectives, goals, constraints and requirements. Success criteria are done to determine the non achievements of the organizations aim. Figure 1: Risk management details for new product development. Risk analysis criteria is made to identify the risk associated with the higher success level as well as low level of success in the organizations new produce invention. Threats and risks are identified to determine the most risks associated with product development (Knight, 2010). Tools for risk identification will also be devised to ensure that risks at each stage are well identified. technique stage QTY QLT IRA NPV Contractual risk report Monthly market RM report DT Risk management post implementation review. research Product design procurement production Marketing Demand analysis Close. Figure 2: risk management technique at each stage of product development. Risk management therefore is a process which requires being implemented with regard to the product lifecycle phases during the development. With the improved level of technology, it is very hard for the organizations to predict market uncertainties which are posing threat to the risk management process ( Klinke & Renn, 2002). Therefore the organization needs to understand its objective and values, and the authority and people responsible for the risk management. In product development lifecycle in P&G Company the company will identify the potential risks associated to the product. The risks involves brand equity risk, customer satisfaction risk, catastrophic risk, cultural risks, regulatory risks and trade war risks which are associated at each product lifecycle. Risks are involved in each phase of the product development. Due to complexity and volatility in the market the organization can face difficulties in pinpointing out the threats and potential risks to their products. Figure 3. Risk identification for new product development 4.0 Risk Management Process. Risk management process is a step by step which an organization uses in identifying the risks and looking for the corrective measures to mitigate the risks involved. The steps involves establishing the organizational context, identifying areas which could impact the organizational goals, risk analysis and risk assessment, designing the best strategy to manage the risk , implementing the identified strategy, measuring and monitoring business viability and profitability and reporting the case to the responsible managers. 4.1. AS/NZS ISO 31000 Risk management model. Different risk management projects have diverse risks associated with them. This enhances new risk management to each different project. ISO has therefore set certain steps for risk management process with almost universally acceptable and applicable to different projects (Knight, 2010). International organization for standardization guideline are however applicable in different situations ranging from operations, products, operations as well as asset management decisions. According to the ISO 31000 (Knight, 2010) the approach is broadly made to provide guidelines to organizations in designing, implementing, and maintaining risk management process in an organization. The main purpose of the ISO 31000 frame work is to enhance how the organizational goals are properly met by analyzing risks on a broad view of organizational context. Figure 3: Risk management process. 4.1.1 Communication and consultation. Procter and Gable Company will analyze internal and external communication and consultancy with an aim of improving the general risk management knowledge in an organization. This could be achieved through liaising with both external and internal stake holders, establishing a good communication plan and holding risk workshops. The company will also enhance communication though reporting, having good risk process review. Therefore the organization requires communicating with stakeholders both external and internal in the process as a whole and in any stage of risk management. 4.1.2. Establishing the context. There need to be an understanding of the organizational context as well as the strategies which enhances the way organizational risks need to be considered. There should also be analysis of the P&G company external and internal environment. The organization’s risk associated with invention of new product will be assessed by considering the context established by use of matrix. Likelihood scale analysis. Likelihood Rare. Occur under special cases. Unlikely. Small chances of occurrence. Possible. Risk might on not occur. Likely. There is some chance of occurrence. Certain. Expected. Control environment. Minor impacts identified. Some control issues identified. Control factors impacting the key areas of the organization There are some potential control factors within the organization. No control factors and the objectives of the organization are not met. Consequences. Severe Low Medium High Extreme Extreme Major Low Medium Medium High Extreme Moderate Low Low Medium Medium High Minor Low Low Low Medium Medium Insignificant Low Low Low Low Low Rare Unlikely Possible Likely Almost Certain Likelihood. Figure 4: Risk management matrix. 4.1.3 Risk identification. Procter and gamble will come up with strategies necessary in indentifying potential risks, which could impact the organization and more so in hindering its performance and new product development. There will be identification of strategic risks, operational risks as well as project risks. There should be identification of the risk causes and impacts each risk has in an organization (Knight, 2010). Risks could be identified through workshops, market research, auditing results, analyzing the gap which exists between the current organization practice and objectives and procedures of the business plan (Knight, 2010). Different techniques are employed when undertaking risk identification in an organization. P&G Company will employ risk breakdown structure which will involve breaking down the categories and sub categories in an organization, leading to proper identification of the risks during the new product development phases. There will therefore be identification of how, when and why events could hinder the organization in achieving its objectives. The part which poses threat to the organization will be identified the corrective measures undertaken. Figure 5. Risk break down structure for P&G Company (Hillson, 2003). 4.1.4. Risk analysis. Risk analysis involves consideration of the potential threats the identified risks could pose to the organizational objectives of inventing the new product. Likelihood and consequences are therefore combined to identify risk rating (Rasmussen, 1997). Rating of the risk determines whether the P&G company will take any measures to mitigate risks or not. Risk analysis identifies large risks from minor risks in an organization. This could be achieved by assessing the risk management matrix in figure 4 in determining the level of risk in Procter and Gamble Company in new product development. This is achieved by identifying the likelihood for the occurrence which shows risk occurrence time and consequences which identifies the impact certain risk would have to the organization. In analyzing the risks the organization is mandated to consider all the management strategic controls in existence (Miller, 1992). There is need to consider delegation, organizational structure, policies, procedures, monitoring, supervision, duties segregation, and insurance and contract conditions. 4.1.5. Risk evaluation. Risk evaluation involves ranking and prioritizing the risks depending on how they have been rated. This enhances the management in making decisions with regard to the risk analysis results. Cost benefits analysis and management priorities will determine the way risks are prioritized for the treatment (Kaplan & David, 2001). P&G company will put in use the ‘As low as reasonably practical’ principle in determining how best the organization can reduce the involved risks. Figure 5. The ALARP principle. “Risk management Guidelines comparison to AS/NZS 4360” Standards Australia p. Risks will also be evaluated qualitatively and quantitatively by evaluating the risks for the project failure in the market. 4.1.6. Risk treatment. After analyzing and evaluating risks the organization will have to look for the best options necessary for reducing the risk impact to its general objectives. For higher and extreme types of risks the organization will look for the projects will require very active management, routine monitoring as well as reporting for the risks and with a target for the resolution of the risk ranging from 12-15 months. Low and medium risks can be tolerable therefore the Procter and Gamble Company will periodically monitor and review the risks with resolution target of 20 months. Different options could be used in treating the risks. This involves risk transfer, which is the partial or complete sharing or transfer of risks among or between the involved parties. When the organization identifiable risks seem to be complicated which can’t be shared or transferred the organization should accept them. In addition to that the P&G Company can avoid the risk by failing to be involved in such an activity or failing completely to venture in the indented project of introducing the new product in the market. Lastly the organization can decide to reduce the risk by taking different actions which would eliminate some risks involved in the project (Haslett, 2010). Therefore the organization will choose the best option depending on the efforts and cost involved in action plan implementation and the benefits associated with the plan. 4.1.7 Monitoring and review. New products are prone to failure, uncertainties and low market penetrations Procter and Gamble Company is also experiencing global uncertainties and volatility. Therefore it will be required to review and monitor its action plans and the risk management effectiveness periodically. Review will be basically done depending on risk rating. Top rated risk mitigation measures will be reviewed often as opposed to low rated risks (Frenkel & Hommel, 2002). Monitoring and review will ensure that the identified risks and mitigation measures really reflect the organizational performance in the market. It will also involve risk rating review mostly on consequences and likelihood for the risk to re occur (Frenkel & Hommel, 2002). On top of that the review will identify the appropriateness of the mitigation measures and their effectiveness to the organization. The review will also assist in identifying threats and other emerging risks. Lastly it will help the Procter and gamble company in identifying the appropriate risk management system. 5.0 Risk management techniques analysis. 5.1. Inherent risk assessment. Inherent risks are risks which are susceptible to the audit about certain misstatement that could bring about change to the balance either individually or even when aggregated with other misstatements. In inherent risk assessment there is consideration of the threats forced by internal factors which should be considered when determining the risk control factors. Therefore it involves identification of how susceptible the misstatement which is material depending on the organization type (Fragnière & Sullivan, 2007). The risk can be increased by universality factors like managers dishonest and specific factors like theft. Inherent risk can be increased by expired or change in patent rights, economic change, availability of finance, economic growth, organization susceptibility to theft and previous misstatements. For example P&G Company can be experiencing inventory theft hence the need to consider the inventory account as an inherent risk. Consequently, when assessing inherent risk it is necessary for the team members to consider control factors to have effective risk identification and mitigation measures. 5.2. Qualitative risk assessment. Qualitative risks method is used in assessing risks which are simple and can be rapidly assessed. The company risk management teams gathers information regarding risks and categorizing them as either certain, uncertain, high, medium or low risks ( Epstein & Adriana, 2005). Once the risk is rated for higher risks the organization should take measures to mitigate the risk to reduce its impact to the organization. Qualitative risk management is based on the organizational structure and risks involved. Qualitative analysis involves estimating the losses but not the data involved. Qualitative assessment identifies first the threats by identifying what is likely to go wrong on the project or new inventions. Secondly is the vulnerability which involves assessing the potential prone which could facilitate the risk occurrence. Lastly it is control measures which could be detective, preventive, and corrective controls to reduce the rate of risk occurrence. After risk identification they are grouped in matrix by likelihood of occurrence and the level of risk. Risk level Probability of occurrence. Frequent(A) Probable(B) Occasional (C) Remote (D) Improbable (D). 1.high 2.Medium 3.low 4.Very low. Risk 1-not desirable and immediate action requires to be taken. Risk 2-not desirable, requires immediate action though management control is allowed. Risk 3-Acceptible under management review. Risk 4-acceptable without management review. -Frequent means that the probability of occurrence is very high. -Probable-probable of several isolated risks. -Occasional-potential of occurring for sometime. -Remote- potential for occurrence is very low. -Improbable- meaning it is hardly likely to occur. 5.3. Quantitave risk management plan. Quantitative risk assessment technique involves the use of probability in determining the level of risk occurrence. It is mostly used when the involved risk can be quantified. In quantitative risk assessment there is use of boyes probability model or the Monte Carlo simulation model in identifying the way risk will affect schedule of the project. In assessing the teams’ needs to identify risks associated with the given asset value (Knight, 2010). Quantitative analysis therefore provides a clear goal and results of risk assessment. Quantitative risk assessment is done by assigning quantifiable factors to the assets, identifying the potential risks and threats, determining the probability of each threats occurrence, determining the organizations loss potential due to the threat fro a year, and recommending the necessary measures and actions for mitigating risks( Epstein & Adriana, 2005). Quantitative risk plan will be employed throughout the operation stages to determine quantitative the impact the risk might pose to the organization. 5.4. Decision Tree. Decision trees are required when one wants to choose from different options. It assists an individual or organization in choosing the best choice possible. Decision trees lays out a frame work for determine the choice to make as well as identifying the out come for making such a choice. Decision trees also assist in identifying the picture associated with the possible actions taken in regard to rewards and risks. In assessing the risks individual draws a decision tree. Thereafter there is analysis of each action in decision trees on its outcome or potential impact when undertaken (Epstein & Adriana, 2005). After analyzing actions one considers the option which one thinks to be the best based on the action with highest worth. One can also assign net worth to different outcomes to make estimate of each action in monetary value. This will assist in assessing potential risks effectively and fostering for the necessary actions depending on the effort and cost associated with it as well as benefits retrieved from each action undertaken. decision tree estimating the probability of the product failure or success after introducing to the market and identifying possible causes of failure. Figure 6: decision tree. 5.5. Net present value. The main purpose of the risk management is to achieve the organizations objective with minimal risk possible. Risks are due to future uncertainties. Net present value has been one of the most widely used performance measures in management and selection of the project. In assessing risks using the net present value the money value is put into consideration as well as project cash flows which are discounted under certain discount rate. Projects with positive net present value are worthy as they have minimal risks associated with them (Leland, 1998). Where as projects with negative net present value are risky and should always be disregard. In regard to the use of the NPV in determining the project risks t is necessary for the organization to evaluate certain part of the project as whole project takes long time to mature hence the time frame can impact the value of the NPV. 5.6 Contractual risk assessment. Contractual risk assessment is used in identifying the risks brought about by the suppliers in an organization. Procter and Gamble Company will require being prepared to mitigate contractual risk as the new product requires unique supplies hence suppliers may pose threat to the organization. 5.7. Monthly RM states report. Monthly RM states report is used mostly in evaluating the project progress. During the new product implementation each stage should be reviewed to determine its progress and identify whether risk measures taken are effective in different phases or not for the organization to take corrective measure (Culp, 2001). Procter and Gamble Company will do monthly risk management report to identify risks which requires being updated, potential risks and reassessing the existing risks potential threat to the organization in all stages of product development. 5.8. Risk Management completion report. After the project completion project evaluation in relation to the time spend, cost involved and quality of the project is assessed and the report forwarded to the managers for the review (McNeil, Frey & Embrechts, 2005). It is also necessary in determining the amount which has been used in a certain project in a comparison to the cash allocated and if the cash will be adequate for the other remaining phases. In Procter and Gamble Company risk management completion report will be used when the company will be inventing new beauty product. 5.9. RM post implementation review. Risk management implementation review is necessary for the organization in determining if the actions taken, where necessary in mitigating the identified risks. It provided the necessary measures undertaken in past and history of risk management in an organization (Haimes, 1998). The organization will do RM post implementation review to ensure that the organization is certain on all what is happening and has to continue monitoring and evaluating the project risks as well as advocating for the necessary changes, hence the identification of the effectiveness of the risk management system employed. 6.0 Case study. The case study shows practical risk management in Procter and Gamble company for the development of new beauty product. It indicates the risk management process necessary for identifying and mitigating risks. Communication and consultation. situations No such brand in the market pain Financial loss End state pain Increased returns concerns Product failure to penetrate to the market Questions. Will the product perform or it will fail after introducing to the market. Establishing the context. IRA assessment No question yes NO 1 Has the organization developed such product before? 1 2 Is there any other organization which has done it 1 3 Is the product design okay 0.5 4 Will the available technology be adequate 0 5 Is the product likely to provide adequate return 0.2 6 Are the financial resources adequate 0 7 Will the product perform poorly 0.3 8 Is the level of success high 0.2 9 Does the organization have right personnel 0 10 Do organization have stakeholders 0 Scale : 0-2.5 low risk. 2.6-4.9. moderate risk. >5= higher risk. Risk identification analysis. Risk matrix and likelihood will be used to analyze and identify potential risk. Risk matrix Consequences. Severe Low Medium High Extreme Extreme Major Low Medium Medium High Extreme Moderate Low Low Medium Medium High Minor Low Low Low Medium Medium Insignificant Low Low Low Low Low Rare Unlikely Possible Likely Almost Certain Qualitative quantitative rarely 0-5% unlikely 5%-20% likely 20%-40% Medium 40-75% Almost certain. >75% Risk evaluation. Two methods will be used in evaluating risks. Risk register. stages Risk level research 2% Product design 6% procurement 20% production 50% Marketing 30% Demand and market operation 15% Close. 3% Production is the level with higher risk which organization should monitor to avoid project failure as it could cause higher damage. Risk treatment plan. Qualitative quantitative Mitigation measure rarely 90% Transfer, mitigation 7.0 Conclusion. Risk management is very crucial in an organization especially when developing new product. It will be very easy for the Procter and Gamble Company to determine the threats and uncertainties’ associated with the new product development. The company will also achieve inevitable success in the market after identifying the potential risks and putting into use the correct mitigation measures (Haimes, 1998). The paper has analyzed completely on the ways of identifying and correcting threats involved in the project which will enhance the product development success. Monitoring and review for the risk management process will assist the company in identifying threats associated to the project early enough and take appropriate measures at the right time possible. Different risk assessment techniques could be used in identifying the risks and making the correct choice possible after assessing the risks associated to certain action. In enhancing risk identification and risk assessment in certain project an organization should make use of the risk analysis tools as well as risk analysis process to identify threats. Therefore for the organization to have effective success in new product development it is necessary for it to consider risk management as a priority as it helps in enhancing project success by identifying potential downsides as well as way of identifying the correct actions to take in risk treatment hence organizations success. References. Crouhy, M., Galai D., & Mark, D. (2001).Risk Management. McGraw-Hill companies. Crouhy, M., Galai D., & Mark, D. (2006). The Essentials of Risk Management. McGraw-Hill companies. Culp, C. (2001).The Risk Management Process: Business Strategy and Tactics. New avenue: John Wiley and sons’ ltd. Epstein, mark J. & Adriana, R. (2005) Identifying, Measuring, and Managing Organizational Risks for Improved Performance, Society of Management Accountants of Canada and AICPA. 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Agency Costs, Risk Management, and Capital Structure, The Journal of Finance, 53: 1213–1243. McNeil, A. J., Frey, R. & Embrechts, P. (2005). Quantitative Risk Management: Concepts, Techniques and Tools，America: Princeton University Press. Miller, K.D. (1992). A Framework for Integrated Risk Management in International Business, Journal of International Business Studies, 23 (2): 311-331. Rasmussen, J. (1997). Risk management in a dynamic society: a modeling problem, Safety Science, 27: 183–213. Read More