Risk Assessment: Manufacturing and Credit Risk

/ June 10th, 2010/ Posted in How to do Risk Assessment / No Comments »

How should risk assessment in business be conducted? We might differentiate risk identification as an exercise in exposure analysis, using conventional categories of loss, from a more comprehensive concept of risk ID called for in Enterprise Risk Management.

An expanded idea of risk ID and assessment is useful in complex contexts.

In recent weeks I’ve been corresponding with a loss control expert based in Dubai who took my online course (How to Conduct High Quality Risk Assessment). We were trading notes on how risk assessment in business is done. He has particular challenges in risk assessment: construction and manufacturing firms are his specialty. He described credit risk analysis for manufacturing concerns:

“The most important factor is the collateral back up shown to the credit manager at the time of availing the credit, and the projected revenues after (supposed) infusion of the borrowed funds.”

He went on to say that the analyst has to check the deployment of the borrowed funds, using his/her knowledge of the manufacturing process, inputs and associated costs. The next task: “root cause analysis of failure (if the venture is on the red side ) and of the activity to generate the required revenues”, using both financial and technical engineering expertise.

I suggested: It seems to me that just here might be the right stage at which to conduct a comprehensive risk identification and assessment session, or a series of them, using a round table of experts. As long as the sessions are carefully prepared by establishing context, and the right visual and discussion aids are used, it is possible to identify risk reasonably comprehensively along several lines of inquiry in a systematic fashion:

  • strategic concept: macro-economic risk and market conditions;
  • cash flows and financial model: examine assumptions and probability estimates;
  • business continuity and resiliency;
  • manufacturing process flows and technical infrastructure;
  • management and HR; organizational culture;
  • supply chain: sole/single source and third party suppliers;

and so on, depending on the scope of the project and time available to conduct the analysis. As a rule, in past projects, I’ve been able to complete sessions with 6 to 8 participants on a particular risk context in 2 or 3 sessions of 3 hours each, assuming adequate preparation and follow-up by email.

This idea seemed to strike a chord with my correspondent:

“Yes, the 4th para of your second mail [multi-disciplinary risk ID session] is a good solution. The finance professional alone holding responsibility for the risk management of any organisation is definitely a misconstrued idea… Statistical data, models, assumptions and precedents can help to some extent only. A correct and responsible study of the risk exposures and arriving at mitigation is the correct and useful method. Many times the collateral is not properly and professionally assessed and is commonly over-stated /over-valued to satisfy the lender.”

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