Insights & Analysis

Risk Management 101 for SMEs

BY Ruoshan Tao 1 Oct, "14

We know that risk management is an intimidating term that's typically associated with large multinationals. Most of us can vaguely understand its importance, but find it difficult to apply these principles to SMEs. After all, the relative complexity of many of these large company’s operations means that risks appear to be more difficult to manage - which unlike our own small businesses, warrant a coherent strategy.

Nothing could be further from the truth. In the wake of large scale environmental, political, and industry events however, it’s SMEs that are affected the most. Without the resources available to larger enterprises, SMEs must rely on governments and other organizations and are often forced to be reactionary to macro level conditions. This is a structural issue that’s difficult to address. One possible solution might be to encourage better organization between SMEs within geographies and industries, but that's an ambitious project that requires dedication from a lot of different stakeholders.

Nevertheless, there are processes that decisions makers can periodically review to ensure that their operations are in optimal condition. Ask yourself, what can I do to refine my own business processes and minimize risk? The answer is a lot simpler than you might think.

Defining risk management

According to the Financial Times lexicon, risk management is “the process of identifying, quantifying, and managing the risks that an organization faces”.

Know what to look out for

In the US, an astounding 99.7% of US businesses are SMEs. These firms have less than 500 employees and employ over 80% of the workforce. A similar landscape exists in the UK, where 99.9% of all UK businesses are considered SMEs.

Despite overwhelming statistics to suggest that SMEs should be the primary focus of supply chain management research, the reality is far from it.

Redirecting SCM focus to SMEs

Most of the research out there on Supply Chain Management (SCM) has focused on larger organizations, including Walmart, HP, car manufacturers etc. Given the structure of the economy however, it seems like this focus is unwarranted.

Understandably, SMEs are often the most exposed to the effects of certain types of risk, as a result of limited resources and structural issues outside of their realm of control. One of the problems originates from a lack of awareness - since the vast majority of SCM risk management resources focuses on large scale, complex operations; issues that are more applicable for SMEs are glossed over.

What is the most important point of differentiation however, is that SMEs are more susceptible to problems involving linkages between multiple supply chain parties and their subsequent ripple effect. This is because larger companies tend to do more in-house and rely less on external organizations.

In addition, the resources available to larger organizations, including supply chain management experts and complex internal controls technology, may not be available to SMEs.

Let's identify the problem at hand.

What SMEs should look for in managing risk

Here, we’ll discuss how SMEs should forecast and manage risk appropriately, given certain resource limitations. At its simplest definition, a supply chain consists of at least three entities; a company, a supplier, and a customer.

How exactly do these three entities link together for your business and industry?

As a decision maker, it’s important that you identify potential problem points. If you’re a wholesaler, what are some things that could potentially disrupt your supplier’s ability to provide goods on schedule? If that does happen, do you have safety stock available to carry you over until the issue is resolved?

For manual work intensive industries, have you factored in employee well-being into your operations? Tired employees tend to make more mistakes, which could cause a ripple effect into other parts of the business.

Another linkage that has the potential to cause problems is the link between the company and its customers. In the case of weather problems that delay delivery, particularly for time sensitive sales periods such as Christmas, does the company have a plan in place to keep customers happy?

For example, during the UK winter of 2010-11, severe weather conditions was estimated to have cost the economy approximately £1.2 billion in damage a day, with a total cost of £13 billion. Retailers were hit particularly badly, with losses in sales at nearly 20% compared to the same time last year.

Acknowledgment of your failure to deliver is often appreciated. Have a contingency plan in place in case things go wrong. Identify potential pain points, and address them before they become a problem.

Most importantly, have a plan in place that you can share with your customers. When things go wrong, transparency is key. A simple ‘sorry’ can go far in helping you stay in your customer’s good books.

Using the right tools

Through modern technology and the abundance of new cloud-based business systems available on the market, SMEs should also strive to leverage technology and big data to make sound risk management decisions. Automating certain manual processes, like updating inventory information as sales data comes in, could help you make better purchasing decisions.

Choose the right tools in the execution of your chosen strategy
 

Knowing sales information isn't enough. Your purchasing and inventory information is just as important as they’re the primary sources of tied up capital. This gives you the space to make decisions day-to-day, and having some additional capital set aside will help you deal with unforeseen circumstances.

Adequate preparation can prevent mishaps, and regularly setting aside resources to address unexpected problems is an integral part of risk management. All of these factors are potential risks that business owners should address.

Since every SME is different, it's up to decision makers to identify relevant risks that are associated with their operations and formulate a plan accordingly.

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