Introduction
Risk management is a critical aspect that provides organisations with the security to operate with limited danger. Managers can either reduce or avoid risks that are likely to encounter their respective organisations. This paper analyses in detail the risk situation faced by Aqua Plc., a water company.
The firm has encountered increased competition due to its high operating costs and is seeking to lower the same through the acquisition of new equipment and materials.
Project Objective
The objective of the project is to address the poor market performance of Aqua Plc. The company has suffered mainly from two areas of technology and failure of control over its entire marketing procedure. As a result, its production has relatively been higher than that of its competitors in terms of cost, while the profit margins have also been smaller.
Risk
Equipment acquisition
There is likelihood that the new production line equipment may not be supplied to Aqua Plc in good time. The new equipment is being ordered from a supplier who must also get involved in testing its operations prior to the full launch.
This means Aqua Plc directly relies on an external company to help it install and launch the equipment (Kremljak et al. 2012, p. 1717). It has no direct control over the equipment’s supplier and thus this is resulting in heightened risk.
Apart from the supplier of the main equipment, provision of materials also needs to be undertaken by suppliers (Kremljak et al. 2012 p. 1717). The main equipment’s supplier does not deal with the necessary materials required for the functioning of the equipment.
Aqua, thus, needs to enter into agreements with other supplier firms to enable the delivery of the materials, such as injections moulds, plastic materials, as well as other accessories.
This further causes the risk in the sense that Aqua is depending on various supplier firms to sustain its new programme yet it lacks direct control over the supplier firms. Even where one supplier firm fulfils its obligation of delivering the materials, the project may still fail to take off because all suppliers involved must fulfil their obligations in time to enable the project take off.
Technological impacts and aspects could as well result into a risk. While the suppliers may deliver the equipments in time, technological challenges may hamper the immediate operation of the same. The equipment’s standards and requirements may fail to match with the actual production at Aqua Plc (Real, Leal, & Roldán, 2006, p. 284).
In this case, it may require additional time for the supplier to acquire the right technology before launching the new equipment. Additionally, it may force Aqua Plc to spend additional capital, on top of the 1,500,000.00 already paid to have the proper alignment and installation of the new equipment.
Impacts
The suppliers’ delay to deliver the new production equipment will result in Aqua Plc continuing to operate under high production costs (Berry & Collier, 2007, p. 1005).
The frequent equipment breakdowns at the firm will continue, which hampers Aqua from attaining the targeted volume within the next two years. The price of its finished products will remain high, thereby limiting improvement of the firm’s performance in the market (Morten, John & Harry, 2003, p. 369).
Equally, the old equipment currently in use at Aqua does not help in the satisfaction of Health and Safety parameter, as well as achievement of the set water quality standards as is defined by the World Health Organisation, WHO.
In essence, Aqua may still face difficulties in marketing its products because they do not meet the certified standards (Mitchell, Moutinho, & Lewis, 2003, p. 1). Consumers often rely upon such standards before making their buy decisions (Beatty, Scott Liao, & Weber, 2010, p. 17).
New equipments often come with training on how to operate. The training takes significant time, depending on the complexity of the technology involved.
In the case of Aqua, these trainings may imply the equipment operating at a lower rate as workers are educated on how to operate the machine and other related procedures (Yen-Ku & Kung-Don, 2010, p. 287). Such a reduced scale of operation, on the other hand, would imply that the firm operates at below capacity thus failing to achieve its break-even point within the anticipated time.
Change of Marketing Procedure
The new marketing plans by Aqua Plc. pose as a risky affair for the company. Selling directly to the retailers may see the wholesalers and distributors shun Aqua products because of lack of market. Selling directly to the retailers is an indicator that the distributors and wholesalers will not be able to sell to the retailers. This is risky because reaching all the retailers will be costly for the firm.
Additionally, it is a costly venture because the economy of scale advantage that comes with selling products to the wholesalers and distributors is not achievable with the retailers. Thus, the high costs of direct distribution to retailers would still minimise the profit margins of the firm (Burnard & Bhamra, 2011, p. 5581).
Impacts
The high costs of distributing the company’s products directly to the retailers will see the firm lose its competitive ability further. The high costs of distribution will be passed down to consumers in form of increased prices. Thus, Aqua will continue facing the disadvantage of price in the market, compared to its competitors and rival products (Reissner, 2008, p. 143).
Qualitative Assessment of the Risk
The qualitative risk faced by Aqua Plc. is high. The firm needs to pay a cost of 1,500,000.00 in order to acquire and establish its new equipment. Delays by the supplier will see the company having already spent the amount yet not benefiting from the equipment advantages.
The continued use of the older equipment will thus see the firm’s operations maintain the high cost of operations, which is a disadvantage to its competitive business position.
An alternative for the firm in case of delayed deliveries is to rely on the old equipment but operate on night shifts as well in order to meet the expected volume in production. This will see a further 185,000.00 being spent to sustain the night shift programme (Piercey, 2011, p. 223).
There is also the aspect of damaged reputation, which comes in as a result of the delayed delivery of the equipment (Tong, 2013, p. 131). Water products are expected to meet health and safety directive as well as fulfil the acceptable quality standards as have been established by the World Health Organisation (WHO).
The old equipment at Aqua does not satisfy these standards. Thus, a delayed delivery of the new equipment will see the company continue to sell products that do not meet the agreed set standards. Once consumers of the product become aware of the quality issues that are being compromised by Aqua, they will shun the product.
Thus, Aqua will run into further losses as it will experience a big drop in its sales. A combination of the costs involved and the reputation risks makes the qualitative risk faced by Aqua Plc to be high (Soares et al. 2011, p. 69).
Responses
Risk avoidance
Aqua can avoid the risk of delayed supplies by acquiring and installing the equipment well in advance, before the scheduled commencement date of April 30th. The supplier should be given early dates, of say March 31st as the deadline for delivery.
In such an instance, even if the delivery delays and is done on April 10th, for instance, Aqua will still have ample time to install and test the equipment in readiness for the actual launching on April 30th ( Butler, 2010, p. 60).
Aqua Plc. may as well consider increasing the capacity of its current equipment and therefore eliminating the need to have new equipment supplied. Because the old equipment is already in existence at the firm’s premises, there would be no chances of delays being experienced in terms of suppliers’ hindrance. Instead, Aqua will only need to introduce the night shift sessions such that its capacity is upgraded to the targeted volume.
Risk reduction
Aqua needs to have at least two different supplier firms for each category of equipment and materials. This will provide the firm with more assurance that the plan’s chances of failing are limited. As the deadline of the implementation approaches, Aqua needs to constantly keep in touch with the supplier to determine whether the ability to deliver the equipment on time is still there.
In case for one reason or the other the supplier is unable to deliver as agreed, a second supplier firm should immediately be informed so that arrangements can be put into place (Baruch, & Klosterman, 2013, p. 240).
Alternatively, a better way of reducing the risk would be to include clauses in the supply contract that spell out measures to be applied to the breaching party (Ribeiro, 2005, p. 53). Aqua Plc. can consider including a clause that require the supplier to pay 20 percent of the contract’s value in case delivery of the equipment is done after the scheduled dates.
Any further delays, of say more than a week, should see the supplier pay up to 30 percent of the contract’s value. The money acquired from the penalty will be used to reduce the risk level, such as investing it on the current equipment in order to enable night shift operations.
Recommendation
The best remedy for Aqua Plc. in addressing the risk that it is currently facing is to avoid the risk altogether. In particular, the avoidance should be by way of acquiring the equipments in advance, before the actual launching date of April 30th.
The firm should identify the rightful supplier but quote March 31st as the final date of delivering the equipment. Once delivery and installation is done as agreed, Aqua Plc. should engage the services of the supplier in test running the equipment to ascertain its viability.
For a period of four weeks, between March 31st and April 30th, Aqua Plc should undertake training of its staffs, particularly those that will be involved directly in operating the equipment, to increase their efficiency. The services of the supplier firm should be hired to support in the training exercise.
The official launching date of April 30th should see Aqua Plc run the new equipment at full-scale capacity. This will ensure that the firms’ objective of achieving its expected volume is actually attained on time.
Conclusion
Aqua Plc. is facing the challenge of increasing its production capacity in order to lower the high cost of production. Its marketing function has also established the need to directly distribute finished products to the retailers while by passing the distributors and suppliers. The firm has to acquire a new equipment to enable it achieve the right production levels.
However, this is risky because the supplier for the new equipment is likely to delay and thus affect the production. The risk is high because the cost of acquiring the new equipment is 1,500,000.00. Additionally, the old equipment currently in operation does not meet the health, safety and quality standards as are defined by the World Health Organisation.
In essence, Aqua Plc further faces a reputation risk because buyers may easily shun the products by virtue of the fact that they do not meet the standards. The firm can avoid these risks by planning to acquire the equipment and materials well in advance, or upgrade the existing equipment to increase its volume capacity.
A risk reduction remedy for the firm could involve adopting more than one supplier for contingency reasons or including clauses in the supply contracts that seeks to punish the supplier in case of delayed deliveries. Aqua should adopt the risk avoidance strategy of installing the equipments and materials prior to the launch date.
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