By Dr. Vishnu Kanhere
Chartered Accountant
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Risk Management
We have covered strategic risks; we now begin with
operational risks. The first of the operational risks is ‘Manufacturing Risk.’
As we move from strategic risks to operational risks it becomes more hands on
and more of detailing. Thus while strategic risks are dealt with more at a
higher level, operational risks have to be tackled where, as they say, the
action is.
However in dealing with manufacturing risk, one has to deal
with it right from the design stage which is conceptual and hence this borders
on strategy.
Manufacturing process per se is a very complex
process, especially if it is technology-dependent, therefore it requires
effective risk management. There are six stages of ‘manufacturing’.
First : Concept stage — this is where a
product/tool is conceived, and is still an idea.
Second : Material solution stage — provides it
with a shape, size, form and matter — giving it a tangible form.
Third : Technology development — identifies the
components and systems needed for manufacture.
Fourth : Engineering and manufacturing development
Fifth : Production and deployment, and
Six : Operations and support.
In the present day scenario integrating risk management in
the production process is very important. It is necessary to do right
from the design and development stage itself. Yet a note of caution should be
extended here, for ‘risk management’ process to be successful, it should be
introduced in designing the process and then diligently managed throughout until
the product finally comes out. This risk management process can become extremely
crucial in some industries. For example, successful risk management is critical
to the design and development of safe and effective medical devices.
Hence, manufacturing risk covers a wide range of risks
ranging from concept design, choice of technology and equipment to minimise
tooling manufacturing defects, operational breakdowns, maintenance costs by
prescribing procedure and schedules. All this is to control the risk of
escalation in ‘manufacturing’ cost.
Manufacturing risks can be very substantial as mentioned
above, as it covers performance and product warranties/guarantees.
Even in case of tested products there are risks of changes in
materials, specification, regulatory standards and norms or even technology
obsolescence.
These risks vary according to the complexity involved in the
product and/or the process of manufacturing the product. The recent ‘Nano’
catching fire exemplifies ‘manufacturing risk’.
The case study for this month for manufacturing risks is that
of a car manufacturer.
Big Boss Motors is a leading car manufacturer operating in
the large and medium-sized passenger cars and goods vehicle segment. The company
has a relatively good track record and has earned a good name and reputation in
the market.
It plans to diversify operations and expand its market share
in the passenger car segment and has therefore launched a small people’s car
‘Beta’, that is very reasonably priced. The fortunes of the company are on the
rise, however the company has received sudden setbacks. The first is that the
tried and tested mid-size passenger car model ‘Gamma’ developed a sway at high
speeds and the entire batch/lot of cars produced in October, November and
December 2009 of over 60,000 vehicles had to be withdrawn from the market. The
new car ‘Beta’ though well appreciated has its own share of problems. In three
different cities newly delivered Beta cars suddenly burst into flames attracting
consumer ire and attention of authorities.
As a responsible car manufacturer, the CEO requests you as
the risk manager to outline possible course of action.
The risk adviser recommends :
1. Checking of cars of a particular make by its service stations/approved accredited service stations and replacement of even slightly defective parts — both checking and replacement — free of cost to the customer — though costly is an important PR function to retain the customer and build customer confidence.
2. R & D and quality control department to check all ‘outsourced’ parts — components which could have led to failure.
3. Identifying the vendor who has supplied the defective part component.
4. Increasing supervision at all vendors’ manufacturing facilities.
5. Review vendors’ agreements for assuring product warranty, guarantee and liability.
6. Review inspection procedures on receipt of outsourced parts — components.
7. Lastly, review in-house manufacturing and assembling processes.
The importance of timely root-cause analysis supported by
ongoing research, and effective customer communication addressing product issue
in managing manufacturing risks needs to be kept in mind.
As reported in The Economic Times dated 22-4-2010, Toyota
motors beset by huge safety recalls and host of lawsuits over deaths linked to
its cars, slipped down from 3 to 360th on the annual Forbes list of worlds’
leading companies. The damage could have been minimised by timely identification
of the defect and a service recall of the defective cars.
Let us not forget : ‘Good products build customers and
markets — defective products kill the market’. Hence effectively managing
manufacturing risk is key to success of an operation and acceptance of the
product.
The case study and solution are not intended to be in the
nature of comments on the functioning or management of the companies, but
represent one of the possible approaches selected by the author for
demonstrating the concept and issues of risk management.
