Current Custom and Practice

May 28, 2007 0 comments

Initial primary research has been carried out within a range of Small to Medium Enterprises (SMEs) to investigate the extent to which risk analysis is undertaken. Initial findings indicate that while senior managers, designers, engineers, and quality practitioners are all aware of or have experience in using risk analysis techniques, few attempts to employ formal applications during the development of new projects in product design. Risk assessment was mainly centered on financial and marketing.

There was however evidence to support the view that a number of techniques were employed following initial design and during product development.

The techniques fall into three general categories:

1. Financial risks

2. Operational issues

3. Product failure.

Financial risk analysis was mainly concentrated on cash flow and capital investment ratios based on projected market forecasts.

Operational risk analysis techniques were highly influenced by financial and quality issues.

Product failure risk analyzes were mainly concerned with the avoidance of failure, product reliability and the chain reactions of failure liability.

The route chosen relied on the industry sector and the criticality of failure, that is the degree of catastrophic failure, complexity, consequential loss, cost per product, etc. Smaller organizations tended to estimate the risk of personal loss associated with business failure, mainly developing sensitivity analysis based on 'What if?' modeling, once in production risk reduction programs included: prototype modeling; pre-production runs; matrix diagrams; check lists; cause and effect analysis; field tests; market tests.

SME's in highly technical field used a range of sophisticated techniques as part of contractual requirements these include: failure mode and effect analysis (FMEA); failure mode and effect and criticality analysis (FMECA); reliability engineering; environmental testing; functional testing; simulated life tests; destructive testing to meet contractual conditions. Electronics organizations used a mixture of approaches integrated with corporate clients, for example Quality Function Deployment (QFD); Product and Cycle-time Excellence (PACE) (Gehani, 1992; McGrath, 1992).

An analysis of thirty small firms for product design and development revealed that very few SME's consider risk analysis. They tended to be visionary types of firms in scientific or technology based businesses; few consider risks in terms of opportunity cost. There was a tendency to initially fund new projects from revenues, until cash flow difficulties emerged.

Success is measured in terms of return on investment in successful projects that means that while encouraging innovation the firm must evaluate ideas. There is a tension between these objectives, as most entrepreneurs don't want to be annoyed with evaluation. You can get over this by the fact that evaluation is conditional for funding. Often outside consultants are engaged to carry out some initial evaluation. On each occasion there is a tension between product development funds and working capital. An initial outline risk assessment is carried out and if successful a second evaluation process involving external consultants is undertaken to identify market needs, this often involves critical market research.

Posted by Lisa
Categories: Business Entrepreneurship

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