Governance and culture take center stage at The Risk Institute’s Annual Conference

Conversation surrounding governance and culture recently took center stage at The Ohio State University Fisher College of Business, as The Risk Institute explored the impacts of the two key aspects of business at its Annual Conference. The two-day conference brought together Risk Institute members, business leaders, experts and faculty thought leaders from Fisher for an in-depth examination of the risk management and strategic implications of governance and culture.

Phil Renaud and Jeni Britton Bauer of Jeni's Splendid Ice Creams discuss maintaining culture through crisis.

Phil Renaud and Jeni Britton Bauer of Jeni’s Splendid Ice Creams discuss maintaining culture through crisis.

Considering the various sides of governance and culture is critical to understanding how to leverage risk management to create value for an organization. The conference featured four keynote speakers, Gordon Bethune, former CEO of Continental Airlines; Cameron Mitchell, founder and CEO of Cameron Mitchell Restaurants; Randall Kroszner, former Governor of the Federal Reserve System; and David Gebler, author of best-selling book The 3 Power Values.

Bethune opened the conference and focused on his experience turning around Continental Airlines over a decade, which is detailed in his book, From Worst to First. He emphasized the importance of building accountability between employees and the organization saying, “What gets measured and rewarded, gets done.”

Mitchell is a self-described serial entrepreneur who understands that taking risks is necessary to be successful in business saying, “I may shoot myself in the foot and walk with a limp, but I’ll never shoot myself in the head and make a fatal mistake.”

Academic Director Isil Erel speaking at Annual Conference 2016.

Academic Director Isil Erel speaking at Annual Conference 2016.

During his time with the Federal Reserve System and as a professor of economics at the University of Chicago, Kroszner never imagined he would be helping guide America’s economy through the worst financial crisis since the Great Depression. He discussed the potential ramifications of the Fed keeping interests rates at historic lows since 2008 saying, “When your short-run policy becomes a long-run policy, you will always run into unintended consequences.”

Named one of America’s top Thought Leaders in Trustworthy Business Behavior, Gebler is an innovator of new approaches that integrate culture, ethics, values and performance. His talk detailed how to know if your organization’s culture is a risk factor utilizing the three power values— integrity, transparency and commitment.

In addition to the keynotes, the third-annual conference brought together business leaders and experts for a series of RISKx presentations and panel discussions on women in risk, governance and culture related to business. The culture discussion explored  employees’ attitudes toward risk, mergers and acquisitions, maintaining culture through crisis, and emerging risks in the energy industry.

The Risk Institute’s Executive Education Series will resume November 15 with a discussion on Political Risk.

 

Data Analytics and Managing the Risk of Demand Uncertainty

by Gregory Sabin – Visiting Lecturer, The Ohio State University Fisher College of Business

A 2012 Supply Chain Insights survey asked supply chain managers to name their top 10 pain points. Three out of four respondents listed demand volatility, which made it one of the most painful aspects of supply chain management, second only tosabin Greg supply chain visibility.  Firms can reduce demand volatility and the associated risks by incorporating economic and demographic data to create simple and more accurate business models.

Risks associated with demand volatility include both risks of overestimating and underestimating demand.  Overestimation of demand will cause declines in the firm’s return on assets (ROA) because of the overcommitment of assets and unnecessary expenditures that will be incurred in anticipation of surplus demand that does not materialize.  Underestimating demand is associated with increased production costs, lower quality levels and decreased customer satisfaction.

These risks affect every part of the business, including customer service, financial planning and analysis, supplier development, new product development, human resource management, product/process engineering and investor relations.  As such, firms need to approach forecasting and planning from a cross-functional perspective.

Why are most businesses not already doing this? As recently as five or six years ago, businesses lacked not only easy access to the detailed information needed to add analytical models to their forecasting process, but also the ability to process that information in a cost-effective manner. Traditionally, this meant firms focused primarily on internal marketing and supply chain information such as distributor estimates, sales projections, product lead times, inventory levels, production capacity and workforce head counts.

Now we are seeing the amount of readily available information exploding in the public domain.  As “big data” and tools to access the information has grown to a point of critical mass, firms cannot only access customer, product and competitor information, but also macroeconomic data that is more detailed and forward-looking than what has been available in the past. Combining this economic data with proprietary firm specific information is creating a new proactive approach to balancing the risk associated with forecasting and demand management.

Early adopters of this new approach are utilizing data-driven analytical tools to enhance the planning and forecasting processes and to give significantly more accurate information to all business units involved in their company’s planning process. The pain associated with demand volatility can be reduced because a firm has armed itself not only with better information, but also with an integrated cross-functional perspective.


The Risk Institute Executive Education Series will continue on April 30, 2015 when Professor Sabin will co-lead a half-day session on Demand Uncertainty, Data Analytics and Risk Management. For more information or to sign up for the session, visit FISHER.OSU.EDU/RISK


 

Preparing for Supply Chain Disruption and “100-year events”

john-gray 100x150By Professor John Gray

Tsunamis. Nuclear disasters. Factory fires. These are the kinds of cataclysmic incidents companies often label “100-year events,” putting even the best risk management infrastructures to the test and leaving an indelible stamp on the businesses that survive.

For companies with global reach, however, these so-called 100-year events can occur with striking regularity. For a firm operating in 30 independent regions, the likelihood that they experience at least one “100-year event” in one of those regions in a given year is over 25 percent. Considering each year independent of the other, this company in a half-decade will have a nearly 80 percent likelihood of experiencing at least one 100-year event, making the unpredictable seem, on the contrary, quite predictable.

The incidents themselves don’t indicate a company has taken undue risks or “failed.” In the end, what separates firms with strong risk programs and those with weaker ones is the degree to which they’re aware of risks they face (and have reduced these risks where appropriate), how they detect those risks, and how they respond when an event occurs.

Greif Protest 2014

One Columbus, Ohio-area company, Delaware-based industrial packager Greif experienced its own collision with supply chain risk when one of its plants in Turkey was taken over in the spring. News reports described the takeover as “led by a small radical group of individuals,” reportedly communist workers. The takeover and subsequent plant closing will cost the company $27 million this year, no small change for a firm whose 2013 net income was under $150 million.

From an outsider’s perspective, such an incident can raise many questions: When the company chose Turkey, were these risks considered in comparison with other locations? If they were, how was the risk incorporated into the decision? If not, would they have changed course if this possibility hit the radar? Once the plant was operational, what disruption mitigation plans were implemented? And finally, were there any opportunities for prevention?

It is important to note that Greif already has a well-structured and comprehensive risk management system in place, driven by risk management teams for each strategic business unit. They’re the source of regular monitoring of economic, political and regulatory changes that might impact operations along with education, auditing and compliance management for the company’s global footprint. Even with such a system in place, this incident still occurred, illustrating a brutal truth about supply chain risk management: You can do everything right and will still experience adverse events.

Doing everything right starts with a program that includes four key elements: Assessment, planning, detection, and response.

  • Assessment is crucial as the supply chain is being designed, but it is impossible to assign expected costs to all potential supply chain risks. Companies often use a “red-yellow-green” or slightly more sophisticated coding system to supplement the analysis of quantifiable costs. Assessment also includes evaluations of “time to recover” ( TTR) and “revenue at risk” (RAR) (which goes by other names, including revenue impact and risk exposure) for a given site, which are critical for planning.
  • A key aspect of Planning is Business Continuity Plans (BCPs), which outline steps to be taken in the event of foreseeable disruptions. This is also where firms invest in risk mitigation (for example, owning extra inventory or developing a second source for a component). TTR and RAR provide the justification for such investments.
  • Detection is learning about risks as soon as possible, ideally while they are still developing.
  • Finally, Response is the “real-time” work after an incident has occurred.  Firms with sophisticated supply chain risk systems have “playbooks” to improve responsiveness to many possible incidents.

In the aftermath, companies faced with challenges similar to Greif’s typically revisit their location-related risk management programs and often face another classic problem of risk management: Return on investment. Because quantifying all risks, even probabilistically, is impossible, quantifying ROI is not feasible. Because of this, firms may overinvest in risk management plans after an incident hits close to home, and then scale back programs, ironically, when they have been effective at reducing risk. The general belief in the context of investment in supply chain risk managements currently seems to be “more is better.” As most firms historically have neglected this area, that’s probably a good thing. At some point, though, especially after periods of quiet, CFOs may start asking what return they are getting on risk mitigation plans with such as multiple/backup sources, extra inventory, and a staff working on plans they hope will never be used. Supply chain risk managers will likely need to rely on more and better data on the likelihood and costs of supply chain risks, not just for internal planning but for justification of risk-reducing investments. With the “big data” trend, consultants, entrepreneurs, and even insurance companies are stepping up to try to fill this need. It is far from clear whether supply chain risk will ever be quantifiable enough to develop accurate ROIs for risk-reductions , but it is likely firms will continue to get incrementally better. That’s all anyone, even the CFOs, can ask for.


Professor John Gray is an associate professor of operations at the Fisher College of Business and an affiliated faculty member of The Risk Institute. Prior to receiving his PhD from the Kenan-Flagler Business School at the University of North Carolina – Chapel Hill, he worked for eight years in operations management at Procter & Gamble while receiving an MBA from Wake Forest University. Prof. Gray’s research has received several awards and recognitions, including the 2012 Emerald Citations of Excellence award, the OM Division’s Chan Hahn best paper award at the Academy of Management conference in 2012, and the 2011 Pace Setters award for research at Fisher. He also serves as a senior editor for Production and Operations Management and an associate editor for the Journal of Operations Management. Among his service to professional societies, he is serving a 5-year leadership role for the Academy of Management’s OM Division from 2014-2018.

Interested in supply chain logistics and risk management? Join us for our executive education session on  September 10, 2014  to learn more.  Contact The Risk Institute for details.