Research Paper on Operations Management
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Sample Research Paper on Operations Management
I would like to start by saying that operations risks is a risk of loss as a result of inadequate, improper and failed internal corporate processes, employees, human capital systems and external events that impact organizations. Even though, the operations risks are inherent in virtually every organization and company, typically, one speaks about financial services companies where operations risks are used to assess the corporate processes in order to safeguard against systematic corporate failure.
Operations risks comprise legal risks, yet exclude strategic risk, or the risks that happen because of poor strategic planning and decision making process. Operations risks also exclude reputational risks, or the risks associated with the corporate financial dismay as a result of loss of reputation and market standing. Nevertheless, there is a direct correlations between the operations losses and the decline in corporate image and reputation. Operations risks thus could reduce the corporate image and reputation to the point of organizational collapse and bankruptcy.
Speaking about some examples of operations risks I would like to present the following:
1. Technology failure. Companies that rely heavily on technology need to assure that technology does meet the corporate needs and expectations at all times. Technological failure leads to waste or inefficient use of resources.
2. business premises become unavailable for a certain period of time. Major factory stoppage, accident etc., deprives the company of its premises and causes operations risks.
3. Inadequate record keeping and accounting. Companies that fail to properly account for its costs and benefits ultimately will end up in a financial scrutiny (Cruz, 252).
4. Improper management and supervision. Failure to keep track of the corporate activities and employees results in inefficiencies which in turn contribute to the corporate losses and bankruptcy.
5. Improper financial models and reports. When the company applies the financial models that do not fit the organization and do not fully account for the corporate activities, such organizations experience losses and fail to account for them which leads to further challenges and problems.
6. Rogue trading and cooking the books. When employees and top management is uncontrolled and attempt to pursue personal gains and goals, the company’s financial and operations state will likely suffer. History knows of many examples how cooking the books causes the collapse of the greatest and most famous companies.
7. Regulatory changes. Sometimes regulations impose more stringent requirements that make the current operations at a particular company obsolete or illegal. As a result of such legal changes the company’s operations suffer and unless the company makes proper changes, it’s doomed to failure.
8. Third party fraudulent behavior. This risk involves external influence on an organization. Although, one cannot directly impact the external environment, one can develop proper supervision and control procedures to prevent corporate losses and fraud. Failure to do so again will negatively impact the corporate financial situation and future.
Speaking about the difficulties associated with assessing and overcoming operations risks, I would like to note that it is rather straightforward for organizations to tap and observe various market or credit risks, while at the same time it is rather hard for an organization to observe existing operations risks.. As a result of such inability to precisely observe operations risks, most companies traditionally would consider operations risks as an inherent and unavoidable cost of doing business.
As for the financial institutions which view operations risk as one of the most important risks to be reduced, one needs to understand that these companies are in the business of risk management already, thus they are in need of development of proper risk management systems. The risk management system should comprise the following modules: risk identification, risk magnitude assessment, risk mitigation, capital setting aside for unexpected losses. Usually the financial companies employ existing economic models in earnest to assist them in their tasks. For instance, the creation of various models of financial volatility allowed the companies to better model and predict market risks, a risk caused by assets’ market price fluctuations. There exist various models to assess credit risk of organizations and advise the management on the appropriate action to be taken (Loader, 133).
Not all types of risks faced by organizations can be easily categorized, modeled and reduced. For instance, operations risks like electrical failure or employee fraud indeed are rather hard to model, and they are just operations risks that are inherently present within organization.
Operations risk refers to every type of unquantifiable risk faced by an organization as caused by improper or failed organizational processes, people employed and systems that work inside or impact the organization from the outside. The external losses as caused by acts of God or natural disasters that damage corporate assets, together with major powerline or communications failures that disrupt normal business operations of the company are rather quantifiable and easy to assess. Losses caused by internal problems like employee fraud and product/service errors/flaws are extremely hard to define. Since internal risks are closely tied to a company’s specific product, service or a business line, these risks need to be better understood, and assessed by the organization as compared to external risks (Marshall, 327).
Risk management department of an organization that deals with various types of risks (including operations risk) regularly measures the size and scope of a company’s risk exposure. As noted earlier, operations risk is rather hard to measure precisely, especially on a organization-wide basis. There are several methods and theories and measure operations risks of a company with the matrix approach being among the most popular ones. This approach categorizes losses according to the type of loss-causing event and the specific business line in which a given event happened. In this case organizations are able to know precisely where certain events happen and with which regularity, and thus are able to come up with proper solutions applied to different departments/business lines in which events happen most often (King, 180).
After a potential event and actual loss within organization, management is able to analyze and model the occurrence of events and losses that make up operations risks of that organization. In order to model occurrence, organization needs to create databases for monitoring losses and event and to create risk indicators that summarize data from the databases. For instance, one indicator could find correlation between the number of failed transactions in a department over a specific period of time and the frequency of staff turnover in that department or organization.
Potential losses that also make up operations risks are categorized as arising from either of the two:
1. HFLI-high frequency, low impact. These can be ATM mistakes, small payroll mistakes etc.
2. LFHI-low frequency, high impact. These can be major fraud, acts of terror.
Data and information applicable to HFLI events is already available in most organizations from their internal audit systems. Therefore, modeling and budgeting these future corporate damages because of operations risk can be done rather quickly and accurately. One needs to remember that LFHI evens on the other hand, because they are infrequent, provide the organization with little to no data and thus makes it almost impossible to model the process. In order for a bank to create a certain prediction for such events, it needs to supplement data with the information and data on similar event from other organizations in the industry or outside the same industry. For instance, Global Operations Loss Database (with British Bankers’ association being its supervisor) represents a private-sector institutions collecting data and information on various LFHI events.
Even though quantitative analysis of corporate operations risks is indeed an important input to a company’s risk management system, one is still unable to reduce operations risks to statistical analysis where all one needs to do is to read the statistical predictions. It is for this reason, various qualitative assessment, for instance, scenario analysis is used to assess organizations’ operations risks.
The risk management and the risk department are all about the process of mitigating and lowering the risks that a given company faces on a daily basis. One can make use of hedging financial transactions, purchasing insurance, and even avoiding specific transactions.
The process of mitigating Operations risks requires several steps:
1. Insurance works well against natural disasters.
2. Redundant backup facilities prevent power failures and communications failures (Hoffman,85).
3. Improved internal audit procedures work against employee fraud and internal causes of risk.
There are many possible managerial methods that can be put in place to reduce operations risk, which apparently depends on numerous company-specific factors. One needs a relatively sophisticated MIS (management information system) and contingency planning system to achieve effective operational risk management.
There exists a framework that allows companies to manage operations risks and comprises two principal categories:
1. General corporate principles for creation and maintenance of operations risk management environment (King, 182). For instance, the corporate top management needs to understand that operations risks is a special type of risk which should be overcome with improved internal processes and regular review of existing operations risks strategy. In order to improve the corporate operations risk management strategy risk management needs to make this strategy a part of company’s regular activities and will comprise all levels of employed personnel.
2. General procedures for actual operations risk management. This category allows the companies to develop and then implement various monitoring systems for certain operations risk exposure that a company is likely to experience in case of event. The system will account for losses at certain departments and business lines. A set of policies and procedures for organizational control and operations risk minimization needs to be enforced through internal audit (Allen, 29).
Companies regarding of their industry and nature of business hold certain amount of money to absorb any unexpected losses from risk exposures. The process of capital budgeting for exposures and risks (comprising operations risk management) is an indispensable part of organizational risk management. Usually companies follow the so called Basel Capital Accord that was developed in 2001 and proposed a set of capital charges for banks. Many companies in other industries modified the Basel Capital Accord and developed their own capital charge. For instance banks are recommended to have a capital set off to cover operations needs that would equal to 20% of the overall bank capital requirements (Hoffman, 88).
To stimulate companies improve their existing operation risk management systems, the governments together with other organizations/agencies regularly review the criteria for proper operations risk management. These updates oftentimes allow companies to include their own calculations regarding the probabilities of certain events happening and the average losses that happened to other companies in such situations. The use of such approaches reduces operations risks.
Furthermore, these approaches all utilize the following 3 factors to reduce operations risks within a company:
1. Effective Communication of the commercial imperative for certain corporate structures (formal or informal) and resources. This is when one is able to highlight the corporate losses that go unnoticed frequently because the company fails to properly assess operations risks.
2. Responsibility for managing operations risk. There should be a department or a person responsible for proper operations risk management (Sterling, 204).
3. Incentives. Managers throughout all corporate levels needs to be compensated based on the quantitative and verifiable operations risks dynamics and metrics, providing enough motivation for employees to engage in powerful operations risk management task force.
In conclusion, I would like to say that operations risk is an indispensable part of financial institutions and thus is an indispensable part of corporate risk management systems and software. Unlike other types of risks, operations risk is difficult to identify, quantify, and model compared to market and credit risks. The past decade showed great advances and improvement in management information systems, let alone information and computing technology that allow companies to engage in a sophisticated risk assessment and management.