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16ECONOMIC SCIENCES
CONTEMPORARY PROBLEMS OF RISK MANAGEMENT AT ARMENIAN COMPANIES BASED
ON THE CASE OF "DAROINK" LLC
Ginosyan K.
Russian-Armenian University, Yerevan, Armenia, PhD, Assistant professor
Manoukyan I.
Russian-Armenian University, Yerevan, Armenia, student
ABSTRACT
Today it is hardly possible for any organization to develop and gain its share of the market without creating and supporting a system of risk management. The better the process of risk management is set up in an organization, the more smoothly it will be to manage various production, innovation, financial, commercial processes. The following article shows the analysis of the operation of a famous Armenian company "DAROINK" LLC, which does not pay necessary attention to identification and management of: risks that provide opportunities and risks that cause hazards. To solve this problem, a simple scheme of implementation of risk management function is recommended as an opportunity of further prosperity of the organization. This may serve as an example for many Armenian companies that do not use risk management as a strong tool for development.
Keywords: risk; risk management; "bow-tie" method; process of risk management; risk management culture; principles of risk management; methods of risk management; risk management framework; department of risk management.
Nowadays, in the conditions of uncertainty, any organization is exposed to risks of different types. Modern companies try to secure themselves from those factors and situations that might adversely affect the productivity of their work. To this end, organizations become more attentive about the process of risk management — a complex of connected operations, that guarantees market survival, sustainability of competition and stable economic growth to those companies that implement this complex in a proper way. The main phases of the process of risk management are: risk identification; analysis, assessment and prioritization; management and minimization; control and revision. All these phases are equally important and essential to ensure the effectiveness of risk management [1, p.8]. If a company is incapable of identifying a risk that might threaten it, the organization will not be able to analyze the risk, determine its type and assess the possible harm of it. Only after the company implements the above-mentioned processes, it will successfully use the most appropriate ways of risk management and monitoring to control the development of measures to prevent and reduce its consequences.
The article shows the analysis of the work of an Armenian company "DAROINK" LLC, which — like many other organizations in the Republic of Armenia — does not have a developed system of risk management, and outlines the activities that should be carried out in order to create such system. This will enable further development of "DAROINK" and will represent an example of a simple method of risk management implementation for other domestic companies. Treatment of negative situations gives companies opportunities to reduce the probability they to be occurred, and if they occur, it will greatly reduce negative consequences [5, p.61].
"DAROINK" is a confectionery company (it produces sweets, cookies, marmalade, etc.) located in Yerevan. Since the first year of existence (1998) "DAROINK" has become one of the most popular Armenian brands with a rich assortment of sweets. In the
20 years of its existence the company has received an award "for producing food of high quality" from the Government of the Republic of Armenia and an International Quality Gold Star in Geneva. "DAROINK" confectionery is mainly consumed by the citizens of Armenia of ail ages. The main competitors of the company are: "Grand Candy", "Amchock", "Elite Shant", "Art Sweet" and the Russian brand "KDV Group".
Despite its long history, "DAROINK" LLC does not pay attention to risk identification and risk management — that is to say, the company neither has developed a system of risk management nor has created a department of risk management, which leads to significant problems in its operation. Risk identification, assessment and management are not carried out at this company. Let us present a simple model of risk management system for "DAROINK".
To determine the main risks of "DAROINK" LLC, based on the financial statements of the company, let us calculate such indexes as profitability ratio, liquidity ratio, debt-to-equity ratio and risk quotient, identify main internal and external risks via the "bow-tie" method and conduct the SWOT analysis.
The financial conditions of "DAROINK" have been getting worse for the last four years (Table 1) [6], as the number of assets of the company has been reduced, the amount of liabilities has been increased, and the enterprise is currently operating at a loss. In the year of 2018 "DAROINK" faced a loss of profit equal to $ 453161.94, reducing it by $ 66241.34, which can be considered as a small increment of the company's poor financial conditions. The lack of equity shows that the company is mainly receiving finances by borrowing debts.
It is also worth mentioning that the most profitable year for "DAROINK" LLC has been 2016 - though there was more profit in 2015, other indexes prove that the company's finances were better in 20l6. This demonstrates the existence of problems, that "DAROINK" has to solve in order to overcome the crisis.
Table 1
Main financial indicators of "DAROINK" LLC in the years of 2015-2018 (thousand dollars)_
Year Assets Equity Liabilities Profit
2018 2468.08 (3011.78) 5479.85 (453.16)
2017 2361.83 (2558.61) 4920.45 (519.40)
2016 3586.59 (697.78) 4284.37 142.26
2015 2871.58 (840.04) 3711.62 179.44
As part of the review, such financial indicators as ROS, ROA h ROE that show the profitability of sales, assets and equity were calculated (Table 2) [6].
Table 2
Indicators of profitability of "DAROINK" LLC in the years of 2015-2018
Year Profit Profit Equity Revenue Assets Return on Return on Return on
(thou- before (thou- (thou- (thou- Sales Assets Equity
sand tax sand dol- sand dol- sand (ROS) (ROA) (ROE)
dollars) (thou- lars) lars) dollars) (Profit/ (Profit be- (Profit/Eq-
sand Reve- fore tax uity)*100%
dollars) nue)*100 /As-
% sets)*100%
2018 (453.16) (417.24) (3011.78) (2716.95) 2468.08 16 (16) 15
2017 (519.40) (525.63) (2558.61) (2595.44) 2361.83 20 (22) 20
2016 142.26 173.20 (697.78) 3176.53 3586.59 4 4 (20)
2015 179.44 217.36 (840.04) 2936.76 2871.58 6 7 (21)
Thus, it can be concluded, that the capital invested by the owners of "DAROINK" in 2017, was used more efficiently than the one of 2018. However, compared with the values of 2016 and 2015, ROE has been highly increased. As a result of the calculation of ROS it has been found out that in 2018 the company received ($ 0.033) of profit from every dollar of realization. The value of the ROS of 2018 is less than the one of 2017,
but it is much higher than the ones of 2016 and 2015. In 2016 and 2015 the company profit from its assets, however, in the years of 2017 and 2018 ROA decreased dramatically.
Based on the data from Table 3 [6], it can be concluded that the company has been losing the capacity to pay its liabilities during the last 4 years. Still, "DAROINK" depends on external investments.
Table 3
Acid-Test Ratio (ATR) of "DAROINK" LLC in the years of 2015-2018 in the optimal interval [0,5; 0,7]
Year Cash Short-term liabilities Acid-Test Ratio (ATR) (Cash
(thousand dollars) (thousand dollars) /Short-term liabilities)
2018 5.32 4965.78 0,001
2017 4.76 4282.28 0,0011
2016 62.11 933.30 0,06
2015 38.83 293.62 0,13
Thus, ATR did not belong to the optimal interval [0.5; 0.7] in any of the periods [2015; 2018]. However, 2015 may be considered as the year with comparably highest financial independence from external investments.
Table 4 [6] demonstrates the annual change of CLR from 2015 to 2018. As with ROS, ROA, ATR, the value of CLR reached its highest point in the year of 2015, and the lowest point was the CLR in 2018, when "DAROINK" was able to pay its short-term liabilities with 37% of its current assets.
Table 4
Current Liquidity Ratio (CLR) of "DAROINK" LLC in the years of 2015-2018
Year Current assets Short-term liabilities Current Liquidity Ratio (CLR)
(thousand dollars) (thousand dollars) (Current assets /Short-term liabilities)*100%
2018 1859.20 4965.78 37
2017 1688.60 4282.28 39
2016 2741.84 933.30 293
2015 2070.47 293.62 705
Calculating the risk quotient as a ratio of loss to capital, it can be concluded that the value of the company's risk was equal to -0,2 in 2017 and -0,15 in the year of 2018. The risk is considered to be high, as it
does not correspond to the optimal interval (0.1 and above).
Leverage quotient as a ratio of debt capital to own capital, characterizes the company's risk as high (-1,92
and -1,81 in the years of 2017-2018), when the optimal value is 1,5.
As can be seen, the financial risk of "DAROINK" is quite high, because the company's operations are financed from debt capital and the enterprise does not have its own financial resources. During the last two
SWOT-matrix of
years the company has been operating at a loss: the negative trend of financial indicators is a sign that the enterprise management is inefficient. Obviously, there is a lack of developed risk analysis and risk management systems at "DAROINK".
Table 5 includes information about the company's strengths, weaknesses, opportunities and threats.
Table 5
DAROINK" LLC
Strengths
• Stable customer base
• Good reputation of the company
• Rich assortment of products
• Competitive prices and high quality of prod-
ucts
• Cooperation with international partners,
merchandising development
• More than two trade partners in Armenia
• Organizational culture and qualified staff
Opportunities
• To sell the products abroad and to find a
niche in the overseas market
• To satisfy the consumer needs due to the
wide range of products
• The growth of online orders
• The emergence of new production technolo-
gies
Weaknesses
• Technological disadvantages
• The lack of information about the internal environment, which is open to consumers
• Increased competitiveness
• No diversified suppliers
• Weak marketing
• Loss-making work
Threats
• The emergence of foreign competitors with less expensive products
• Strengthening of existing competitors
• Problems with production process because of the irresponsibility of suppliers
• Economic decline of Armenia
• The country's unstable political condition
• The probability of the reduction of the population's capacity to pay
Source: developed by the authors
Based on the data from the analysis presented above, possible risks of "DAROINK" are internal and external production, operation, innovation, commercial, financial, political and economic risks. Based on the "bow-tie" method let us conduct the analyses and assessments of each of these risks, highlighting the possible threats and their consequences.
The following types of production risks are likely to threaten "DAROINK": performance risk, risk of competition, risk of unexpected costs and risk ofproperty losses (Table 6).
Table 6
"Bow-tie" analysis of internal and external production ^ risks of "DAROINK" LLC_
Contractual relationship with insolvent partners Performance risk Losses of time that the company will spend on finding a substitute partner and reviews of contracts
The partners' delays, connected with non-fulfillment of contractual obligations Losses of the company, connected with: 1) disruptions of products 2) increases in accounts payable of the partners to the company
Changes in partners' decisions: from cooperation with the company to signing contracts with its competitors Losses, connected with: 1) getting possible возможных benefits from signing the contracts; 2) time that the company will spend on finding a substitute partner
Industrial espionage of the competitors Risk of competition The competitor gets confidential information of the company
Inefficiency of the marketing policy The company will not be able to choose the most appropriate market for selling more confectionery
Emergence of new local competitors on the Armenian market; Emergence of new foreign competitors on the Armenian market Losses of regular and potential clients: at least in the short-run period
Changes in the price policy of constant suppliers Risk of unexpected costs Increase of the company's expenses on resource purchases
Reduction in the number of suppliers Complexity of diversification of suppliers and problems with choosing the most appropriate ones
Forced intervals in production process (equipment repair, its replacement, restoration of energy-supply and water-supply systems) Losses of time and, as a result, loss of profit from unsold products
Environmental pollution as a result of production of confectionery; Damage to life and health of the working staff; Damage to lives of the consumers Payments of fines;damaged reputation
Earthquakes and other natural disasters; Theft; Amortization of the equipment Risk of property losses Decreased number of produced confectionery and even shutdown of the whole production process
Source: developed by the authors
The most possible innovation risk for "DAROINK" is the hazard that newly-produced confectionery will not be demanded by the market (Table 7) — such risks may endanger the company at any production stage.
Table 7
_"Bow-tie" ^ analysis of innovation risks of "DAROINK" LLC_
Weaknesses of the company's PR-policy;
Wrong prices of new products;
Weaknesses of the company's technologies of raw materials usage;
Production of new confectionery _with old equipment_
Risk that the newly-produced confectionery will not be demanded by the market
Sunk costs, were spent on the production of new confectionery;
The loss of consumer interest;
Decrease of the company's revenue
SSource: developed by the authors
The most serious operation risks that may endanger "DAROINK" are: risk of incorrect data input and risk of the loss of products. These hazards are able to cause serious damages to the enterprise.
Table 8
"Bow-tie" analysis of operation risks of "DAROINK" LLC_
Intentional mistakes (misrepresentation) in accounting records; Unintentional mistakes (misrepresentation) in accounting records; Risk of incorrect data input False opinion about the company's finances; Gap in the company's budget
Earthquakes and other natural disasters; Theft; Emergency in the plant building Risk of the loss of products Disruption in production activities; Equipment failure and damaged foodstuffs of the plant's warehouse; Impossibility of realization of the confectionery based on initial prices; Problems with production process
Source: developed by the authors
Risk of the loss of product realization (Table 9) can be considered as a commercial risk that encompasses both: internal and external organizational environments.
SSource: developed by the authors
Aside from the above-mentioned types of risks, the enterprise is endangered by macroeconomic and political risks (Table 10). Repercussions of such risks are quite serious.
Table 10
Table 9
"Bow-tie" analysis _ of commercial risks of "DAROINK" LLC_
Decline in demand for the company's products; Displacement of the company's products with the goods of its competitors Risk of the loss of product realization Decline in product realization; Losses of regular and potential clients
Loss of the quality of products during transportation; Loss of the quality of products during storage; Other logistical problems Decline of the price of confectionery realized; Lower revenue
"Bow-tie" analysis of macroeconomic and political risks of "DAROINK" LLC
Inflation; Changes in fiscal system; Emigration of the population Risk of unstable economic and political processes in the Republic of Armenia Increase in the price of new products; Losses of regular and potential clients
Legislative change; Emigration of qualified staff Restrictions on how company's operation; Staff turnover
Source: developed by the authors
Based on the identified risks it can be concluded that there is a strong need of managing their repercussions and appointing workers, who will be responsible for risk minimization.
1. Performance risk:
To reduce the level of this risk, it is useful to follow these steps:
to check regular and potential business partners in a thorough way (for instance, by using the well-known 5C method (character; capacity; capital; collateral; conditions);
• to form contracts in the most accurate way;
• to diversify the partners.
The company's lawyer and production manager can be appointed as workers who are responsible for non-fulfillment of contractual obligations.
2. Risk of competition:
• to form an efficient marketing policy,
• to regularly analyze local and foreign confectionery markets with the aim of revealing potential competitors,
• to scrupulously test the candidates before recruiting them.
Responsible departments: Marketing department; Human Resource department.
3. Risk of unexpected costs:
• to reduce the number of long-term contracts with suppliers,
• to stay in partnership with all suppliers (even with those who are not currently cooperating with "DAROINK"),
• to regularly check and repair the equipment in order to avoid its failures,
• to form additional energy-supply and water-supply systems,
• to take care about the environment via membership in organizations that protect the Earth.
Responsible specialists: production manager; logistics managers; maintenance support specialist; other specialists, whose work is directly related to production process.
4. Risk of property losses:
• to regularly check and repair the equipment in order to avoid its failures,
• to scrupulously test the candidates before recruiting them, especially those whose work is directly related to production process,
• to provide the enterprise with an appropriate security system.
Responsible workers: maintenance support specialists; enterprise security managers.
5. Risk that the newly-produced confectionery will not be demanded by the market:
• to take actions for Marketing and PR departments to work more efficiently,
• to conduct a thorough analysis of prices of goods and services in Armenia,
• to implement annual research works,
• to regularly check and repair the equipment in order to avoid its failures.
Responsible specialists: marketing managers of the company; PR-managers; production managers; other specialists, whose work is directly related to production process.
6. Risk of incorrect data input:
• to scrupulously test the candidates before recruiting them, especially those whose work is directly related to financial reporting,
• to re-check the financial reports by the general accountant of "DAROINK",
• to warn the accountants about strict penalties for intentional mistakes (misrepresentation) in accounting records and to fix the penalty conditions in job contracts.
Responsible specialists: accountants of the company; the internal auditor; specialists of the Human Resource department.
7. Risk of the loss of products:
• to form an efficiently working system of production management,
• to regularly check and repair the equipment in order to avoid its failures,
• to provide the enterprise with an appropriate security system,
• to scrupulously test the candidates before recruiting them.
Responsible specialists: production manager; maintenance support specialists; enterprise security managers.
8. Risk of the loss of product realization:
• to form efficiently working systems of production management and logistics,
• to regularly check and repair the equipment in order to avoid its failures,
• to conduct a thorough analysis of prices of good and services in Armenia,
• to take actions for Marketing and PR departments to work more efficiently,
• to implement annual research works.
Responsible specialists: production manager;
maintenance support specialists; marketing managers of the company; PR-managers; logistics managers; other specialists, whose work is directly related to production process.
9. Financial risks:
• to create an efficient system of financial management, which will give an opportunity to plan, analyze and control the cash flows,
• to hire an investor in order to resolve the unprofitable conditions,
• to review the company's price policy.
Responsible specialists: top management of
"DAROINK", financial manager and the Accounting department.
10. Risk of unstable economic and political processes in the Republic of Armenia:
• to pay attention to economic and political changes,
• to diversify the suppliers on the basis of flexible prices (in case of inflation),
• to sign long-term job contracts with qualified specialists,
• to motivate the staff,
• to take into consideration all the changes in Armenian Tax code and in the laws, which are connected with confectionery enterprises and production enterprises in general.
Responsible specialists: top management of "DAROINK", specialists of the Human Resource department, marketing and financial managers of the company.
After the identification of possible basic methods of risk management at the company, it is important to conduct monitoring of risks via integration of the risk manager or the department of risk management of "DAROINK", that is to say, it is necessary to check whether the measures taken are effective or not, whether new risks appear or not, how these risks affect the company's operation, etc. Thus, the above presented scheme shows the possible implementation of the process of risk management at "DAROINK" LLC [4, pp.89-90]. Aside from this, it is important in modern organizations, including "DAROINK", to form an efficient system of risk management, which is based on such components as:
1. risk management framework;
2. risk management process;
3. principles of risk management;
4. structure of risk management or actors responsible for risk identification and minimization;
5. risk management culture.
The suggested system of risk management is a result of the analysis of basic elements and aspects of risk management of 4 main standards: Australian and New Zealand ISO, COSO and FERMA as contemporary guidelines for an efficient implementation of risk management at organizations [7, pp.95-107].
Risk management framework is a set of components that provide the foundations and organizational arrangements for designing, implementing, monitoring, reviewing and continually improving risk management throughout the organization [2, p.10].
Principles of risk management represent specific rules which should be followed by an organization in order to improve the efficiency of the process of risk management. The following principles are suggested for implementation at "DAROINK" LLC: integration of the entire company in the process of risk management; complex approach to risk management that en-
compasses all departments of the organization; a dynamic response to fast-changing risks; recording of historical, actual and predictive data; constant improvement of human resources as a result of education and learning.
Process of risk management represents constant identification, analysis, risk assessment and management, monitoring and risk review. It is also important here to pay attention to the processes of information exchange and consulting.
Creation of a special structure of risk management means opening a risk management department or hiring a risk manager. "DAROINK" is able to hire professional specialists who will identify, analyze, control and minimize consequences of hazards more efficiently. These specialists should conduct complicated mathematical and statistical analyses, being responsible for creation and development of the culture of risk management at "DAROINK".
Judging by the financial situation of the company, at first it will be more useful to hire a specialist instead of opening a risk management department, because every department requires financial investments, and for "DAROINK" this option might become too expensive.
Risk management culture is a set of conditions which enables integration of the working staff into the process of risk identification and minimization at the organization. Every modern company, including "DAROINK" LLC, should do its best to ensure the staff that the process of risk management is continuous and it requires the engagement of all specialists regardless of the departments they work in [3, pp.9-10]. Consequently, the top management should provide such conditions when the whole organization endeavors to fight against possible negative risks. To make it happen, the personnel should be integrated in the process of risk management; discuss the identified risks without hesitation; report about the risks to the relevant department
and participate in risk heat map monitoring. Staff members should understand that their participation in risk identification and management is important for them, as if an organization does not have serious hazards or, on the contrary, if a company has new opportunities, these hazards and opportunities will unavoidably refer to each employee as well.
The availability of the above-described system of risk management will give "DAROINK" LLC an opportunity to easily identify the riskiest parts of its operation and solve various problems, which will lead to crisis avoidance and constant improvement. Such model of process and system of risk management can be easily implemented by any domestic organization and serve as a framework for timely development.
References
1. Risk Management Guidelines: Companion to AS/NZS 4360:2004.
2. ISO 31000: 2018, Risk management - Guidelines, provides principles, framework and a process for managing risk.
3. IRM's risk management standard adopted by FERMA. Retrieved from: https://www.theirm.org/me-dia/886059/ARMS 2002 IRM.pdf
4. Moeller, R. COSO Enterprise Risk Management: Establishing Effective Governance, Risk, and Compliance Processes. 2nd edition. 2017. 350 p.
5. Hisrich R., Ramadani V. Effective Entrepreneurial Management: Strategy, Planning, Risk Management and Organization - Springer International Publishing, 2017. 230 p.
6. "DAROINK" LLC database. 1 AMD = 0.0021 USD. Retrieved from http ://www. daroink.am/
7. Основы управления рисками организации: Учебное пособие/ Гиносян К.А. - Ер, Изд- во РАУ, 2018. - 153с.
СОВРЕМЕННЫЕ ПОДХОДЫ К АНАЛИЗУ И ПОВЫШЕНИЮ КОНКУРЕНТОСПОСОБНОСТИ
ЦЕПИ ПОСТАВОК
Жаков В.В.
к.э.н., доцент кафедры «Экономика и управление на транспорте»
(РУТ (МИИТ), г. Москва, Россия
MODERN APPROACHES TO THE ANALYSIS AND INCREASE OF THE COMPETITIVENESS OF
SUPPLY CHAINS
Zhakov V.
candidate of economic Sciences, associate Professor of the Department of Economics and Management in Transport,
(RUT (MIIT), Moscow, Russia
АННОТАЦИЯ
В конкурентной среде крупные организации стремятся к тому, чтобы управлять не только собственным бизнесом, но и цепью поставок, т.е. участвовать в управлении сетью предприятий, отвечающих за доставку готовой продукции (товара) потребителям и послепродажное обслуживание соответствующего продукта. Большинство организаций одновременно участвуют в нескольких цепях поставок, поскольку закупают материалы у широкого круга поставщиков и продают свои продукты и услуги многим клиентам. С точки зрения типичной организации каждая из ее цепей поставок имеет внутренние и внешние связи. Таким образом, организациям целесообразно концентрировать свои усилия на наиболее критичных цепях
