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Enterprise risk management initiative at RINL/VSP

The business environment of Visakhapatnam steel plant is changing at an even increasing pace. In response, Visakhapatnam steel plant will continue to evolve and implement a broad range of complex strategic and operational initiatives to strengthen its competitive position and financial performance. As a consequence of these initiatives, Visakhapatnam steel plants risk profile and control environment will be more dynamic than ever before, a situation which presents considerable challenges in protecting shareholder value. The management at Visakhapatnam steel plant believes that this presents considerable opportunities to use risk management and internal audit as tools for enhancing shareholder value. Visakhapatnam steel plant understands that need and value to be delivered from a comprehensive risk management framework within the organization, which would build appropriate mechanism into the business to anticipate and proactively manage the impact of all types of business risks in a sustained manner. The risks have to be identified, analyzed and controlled/mitigated. As part of the contract, M/s.Deloitte Touche Tohmatsu India pvt ltd who have been engaged to carry out the risk assessment have conducted training workshops for one week on risk assessment audit and risk management. Executives of materials management, marketing, finance and accounts and internal audit have attended the program. The general framework of enterprise risk management, methodology for identification of risks, issues involved, impact of each risk, controls to mitigate the risk etc. were deliberated during the training work shop. Risk management framework in RINL/VSP is established in two key business functions: Marketing Materials management. Risk registers are developed through brain storming sessions functional executives and key risks of each area are identified as given below:

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Marketing: RINL/VSP markets its products through headquarter marketing office and a network of regional officers, branch officers and stock yards located at 24 centers all over the country. Consignment agents and consignment sales agents located at these centers provide infrastructure and channels for sale of products. Regional managers/branch managers and their teams provide the front line sales force for assessing the market situation and evolving suitable market strategies for meeting sales targets. As regards the functional area i.e. marketing, various risks have been identified and the reasons for this risk have been mentioned. This can be shown in a tabular form as below: Functional area Risk identified Losing market share Threats of imports Marketing Losing revenue Losing brand image developed over the years Losing customer orders Reasons Due to increase in competition Due to volatile international market Due to slower response to market conditions Due to imbalance product mix Due to inability to provide right product at right place at right time

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Interpretation: The risks in marketing involve Visakhapatnam steel plant has been facing the risk of losing market share, which is due to increasing competition. Visakhapatnam steel plant is involved in imports of materials. Due to volatile international market there is threat of imports to the plant. Being in a competitive business environment a firm should be able to respond to the market conditions from time to time. Because of slower response to market conditions, Visakhapatnam steel plant is facing the risk of losing its revenue. Due to imbalance product mix a company losses its brand image. Visakhapatnam steel plant has been facing this problem in the marketing area. Once the company finishes the production of a particular product, the next step is to make it available to the ultimate customer. Due to inability to provide right product at right place at right time, the company losses its customer orders.

Suggestions:
The Visakhapatnam steel plant should be able to face the competition, and withstand in the market. Only then the company will have a large market share. At the same time it has to respond to the market conditions which will help in generating revenue or the company. In order to meet the envisaged demand for the long products VSP should develop a balanced product mix. The main objective of a company is to make the product available to the ultimate customer at right place at right time. I it fails to meet the customer needs in time, it will have a impact on its goodwill. Materials management: Visakhapatnam steel plant is committed to meet the needs and expectations of the customers and other interested parties. They accomplish this by supplying quality goods and services to customers delight. The Visakhapatnam steel plant largely depends upon monopoly supplies for spares and other materials. Hence, this creates a problem and has been identified as risk. Not only has this inefficient inventory management led to redundant stocks at various stages.

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This various risks identified in the material management and the reasons for this risk can be shown with the help of a table as below

Functional area

Risk identified Dependency on monopoly supplies for spares and other materials Not being able to pass on to the customers in near future Unable to meet production targets Procurement of raw materials from outside Risk in procurement cost Loss of revenue

reasons

Due to fluctuation in material cost Due to non availability of raw materials Due to higher prices Due to purchase from alternative source Due to volatile purchase prices, higher input costs Inefficient inventory management

Materials management

Redundant stocks at various stages

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Interpretation: The risks in material management involve: VSP is not being able to pass on to the near customer in near future due to various fluctuations in material cost. Due to non availability of raw materials, VSP is unable to meet the production targets. The raw materials available or VSP internally are not sufficient. It has been acing the risk o procuring the raw materials rom outside due to higher prices. Due to volatile purchase prices and higher input costs VSP is losing its revenue.

Suggestions:
The production of a particular product depends upon the availability o raw materials. Due to non availability of raw Due to non availability of raw materials, VSP is unable to meet the production targets. So VSP should develop monthly plans for raw materials and other likely products. Usually this is done by the chief heads of the department of RINL. They should plan in such a way that the availability of raw materials should not stand as obstacles for the product to be finished.

Raw material availability: The availability of raw materials should be perfect in order to meet the production targets. The basic raw material used in RINL/VSP- coal and iron ore. The important thing to be noted is that Visakhapatnam steel plant does not have any coal mines. Hence, it has to depend on others. They collect coal from Coal India Ltd. which is a Central Government organization. As regards iron ore, Visakhapatnam steel plant collects from NMDC. The

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management at Visakhapatnam steel plant always plans to have sufficient stock with them. With regards to this they have monthly plans for raw materials and other likely products which is anticipated by the chief heads of the department of RINL. Visakhapatnam steel plant is forced to pay higher prices for the procurement of raw materials.

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CONSUMPTION of RAW MATERIALS

[Quantity in Tons; Value in Rs. Lakhs]

Year 2006-2007 Item Qty Value Description BF-Coke 61172 7616 IND BF-Coke 185317 1479 IMP 0 Iron Ore 13031 319 Lump Iron Ore 436700 7973 Fines 7 8 Sized Iron 169514 4693 Ore 6 2 Coke 0 0 Breeze (pur)

2005-2006 Qty Value 144153 177823 30284 468375 1 162953 4 0 1683 4 1960 9 1260 7089 2 3561 1 0

2004-2005 Qty Value 112327 325458 66931 442013 4 158492 9 5624 1436 0 6304 1 599 4634 4 1894 5 304

2003-2004 Qty Value 117448 155066 459267 6 160442 8 5515 9964 1218 5 3531 2 1554 8 294

2002 2003 Qty Value 66587 31551 430597 8 154278 3 0 4612 1463 3319 6 1408 0 0

2001-2002 Qty Value 92112 (25588) 378496 7 133585 7 11357 4011 (221) 29859 12319 312

Note: 1. Consumption includes handling and transit losses. 2. Coke breeze consumption value updated from RM accounts schedule.

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1. 2. 3. 4. 5. 6.

Analysis and interpretation The rate of consumption of BF coke IND in terms of quantity decrease in the year 2006-07 when compared to the consumption in the year 2005-06. The rate of consumption of BF coke IMP was on higher side during the year 2004-05 when compare to its previous and succeeding years. The consumption of iron ore lump in terms of quantity gradually decreased from 2004-05 to 2006-07. The consumption of iron ore fines was on higher side during the year 2005-06. There is a gradual decrease from 2001-02 to 2004-05 and 2006-07. The rate of consumption of sized iron ore increased during alternate years. Coke breeze was purchased in the year 2001-02, whose consumption was more than the consumption in the year 2004-05.

Conclusion: Consumption of raw materials affects the production of the project. A decrease in the consumption results in decrease in the production and vice-versa. Hence VSP should take effective measures and plan accordingly for the consumption of raw materials. The monthly plans prepared by the heads of the department should be done with outmost care.

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RAWMATERIAL LOSSES-TRANSIT LOSSES

[Qty in tons: value in Rs. Item 2003-2004 Description Value % BF coke 137.91 -100.00 IND BF coke (382.00) -29.22 IMP Iron Ore 367.73 Lump Iron Ore 991.28 35.37 Fines Sized Iron 4.90 0.28 Ore Coke Breeze (pur) Lakhs] 2002-2003 Qty Value -948.00 -69.73 30172.7 0 80148.0 0 258.79 589.28 % 1.88 Qty 1993.00 19353.0 0 2001-2002 Value 16.91 153.12 % 0.51 2000-2001 Qty Value 135.00 07.00 15576.0 0 50391.0 0 132.00 386.00 % 0.52 1.42 -

NOTE:

1. Percentage loss calculated on actual consumption in terms of quantity. 2. Figures in convert negative to indicate gains. 3. Figures of quantity during 2003-2004 are not given. Hence cannot be compared.

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RAWMATERIAL LOSSES-HANDLING LOSSES

[Qty in tons: value in Rs. Item Description BF coke IND BF coke IMP Iron Ore Lump Iron Ore Fines Sized Iron Ore Lakhs] 2003-2004 Value % 0.00 0.00 0.00 63.10 271.95 (8.00) 0.00 9.68 -1.32 Qty -1336.00 -11695.69 -30758.00 (575.00) 2002-2003 Value -60.07 -106.24 -225.58 (9.00) % -4.06 -0.72 (0.04) 2001-2002 Qty Value -5105.00 -37831.00 -5583.00 -15.00 297.8 4 348.8 4 -43.98 (0) % 0.00 -5.25 -0.15 2000-2001 Qty Value -11123.00 7846.00 -5632.00 -620.00 527.0 0 67.00 -43.00 -5.00 % 0.00 -1.73 -0.16 -0.05

NOTE:

1. Percentage loss calculated on actual consumption in terms of quantity. 2. Figures in convert negative to indicate gains. 3. Figures of quantity during 2003-2004 are not given. Hence cannot be compared.

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Analysis and interpretation 1. The handling loss with respect to BF coke IMP in terms of quantity gradually decreased from 2000-01 to 2002-03. 2. The handling loss with respect iron ore lump in terms of quantity was more in 2000-01 and gradually decreased from 2001-02 to 2002-03. 3. With regard to iron ore fines handling loss reduced from 2000-01 to 2002-03. 4. With regard to sized iron ore the handling loss reduced from 2000-01 to 2001-02. But in the year 2002-03 there was no loss. Conclusion: With regard to raw material handling losses, VSP adopted measures to decrease loss in handling ores. On comparison of loss during the last four years, it is observed that there is a gradual decrease.

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Analysis and interpretation 1. Loss of BF coke IND during transit is on higher side during 2000-01 and decreased in the year 2002-03. There was no loss in the year 2001-02. 2. Loss of iron ore lump during transit decreased in the year 2001-02 than in the year 2000-01. Again the loss has increased in the year 2002-03. 3. The loss with regard to iron ore fines was less in the year 2001-02 when compare to 2000-01 and 2002-03. Hence average loss is increased. Conclusion: There is a considerable increase in the raw material transit losses. There fore VSP should have taken measures to decrease transit losses. On comparison of loss during last three years, there is a gradual increase in transit loss.

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