ENTERPRISE RISK MANAGEMENT - CASE STUDY ON PT NUSANTARA RICE MILLS (PT NRM)
By Apricianita Kusumo 19005036
Undergraduate Program School of Business and Management Institut Teknologi Bandung
VALIDATION PAGE
ENTERPRISE RISK MANAGEMENT - CASE STUDY ON PT NUSANTARA RICE MILLS (PT NRM)
By: APRICIANITA KUSUMO ID No: 19005036
Undergraduate Program School of Business and Management Institut Teknologi Bandung
Approved By
___________________________ Dr. Ir. Sudarso Kaderi Wiryono
ABSTRACT Traditional risk management, which means that risk is managed independently, has been implemented by many private and public organizations in the past. However, the traditional risk management technique is considered to be inadequate to face the rapid change in the business environment lately. As the response to this condition, both the private and public organizations have started to implement the concept of Enterprise Risk Management, or usually called ERM. Different with the traditional risk management technique, the ERM is intended to improve the organization’s performance in more holistic ways. With the existence of this ERM concept, many organizations especially companies that do business, can get benefit by applying the concept in their organizations. As one of the companies in Indonesia, PT Nusantara Rice Mills (PT NRM) also faces many risks due to its business operation. PT NRM is a rice milling company that already operated since 1983. In 2004, the company created a large-scale rice-milling project in order to improve the company’s performance and value. However, instead of achieving its goal, since 2005 the company has been experiencing continuous increase of its accumulated loss, which lead to the continuous decrease of its capital. This condition shows that PT NRM is unable to survive in the middle of many changes in its business-operating environment. In order to have a better performance, PT Nusantara Rice Mills (PT NRM) can also uses the concept of Enterprise Risk Management to manage many risks that it faces. The Enterprise Risk Management process itself involves a series of steps, which are business analysis, risk identification, risk assessment, and risk management. In this research, researcher is trying to apply the Enterprise Risk Management concept in PT Nusantara Rice Mills by following the series of risk management process steps. This research provides useful information for PT Nusantara Rice Mills to manage risks that it faced. In this research, the business analysis shows the characteristics of PT Nusantara Rice Mills’ business. Meanwhile, the risks identified focuses on three risks type, which are Financial Risk, Market Risk, and Operational Risk. In the risk assessment, the probability and severity of each risk could be known. In the last step of risk management process, which is risk management, the company could know the most suitable risk treatment for each risk. This research also provides an important recommendation for PT Nusantara Rice Mills, which is to manage risks by using the risk management action resulted from this research. Keywords: Enterprise Risk Management, Value at Risk, Monte Carlo Simulation, Risk Mitigation
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ABSTRAKSI
Manajemen risiko tradisional, yang berarti bahwa risiko dikelola secara independen, di masa lalu telah diimplementasikan oleh banyak organisasi baik itu privat maupun publik. Walau bagaimanpun, ternyata teknik manajemen risiko tradisional dirasakan tidak cukup untuk menghadapi perubahan yang cepat di lingkungan bisnis saat ini. Sebagai respon terhadap kondisi ini, baik organisasi privat maupun publik telah memulai untuk mengimplementasikan konsep Enterprise Risk Management, atau biasa disebut dengan ERM. Berbeda dengan teknik manajemen risiko tradisional, ERM ditujukan untuk meningkatkan kinerja sebuah organisasi dengan cara yang lebih holistic. Dengan keberadaan dari konsep ERM, banyak organisasi terutama perusahaan yang melaksanakan bisnis, bisa mendapatkan manfaat dengan mengaplikasikan konsep ERM di dalam organisasi mereka. Sebagai salah satu perusahaan di Indonesia, PT Nusantara Rice Mills (PT NRM) juga mengahadapi risiko-risiko berkaitan dengan operasi bisnisnya. PT NRM adalah sebuah perusahaan penggilingan beras yang telah beroperasi semenjak tahun 1983. Di tahun 2004, perusahaan tersebut membuat proyek penggilingan beras berskala besar untuk menikngkatkan kinerja dan nilai perusahan. Namun, alih-alih mencapai tujuannya, semenjak tahun 2005 PT NRM justru mengalami kenaikan yang berkelanjutan pada akumulasi kerugiannya, yang mengakibatkan penurunan berkelanjutan pada penurunan modalnya. Kondisi ini menunjukkan bahwa PT NRM tidak dapat bertahan di tengah perubahanperubahan yang ada di dalam lingkungan operasi bisnisnya. Untuk mendapatkan hasik kinerja yang lebih baik, PT NRM dapat menggunakan konsep dari Enterprise Risk Management untuk mengelola risiko-risiko yang dihadapinya. Process dari Enterprise Risk Management itu sendiri meliputi beberapa urutan langkah, yakni analisa bisnis, identifikasi risiko, penghitungan risiko, dan pengelolaan risiko. Di dalam riset ini, peneliti mencoba untuk mengaplikasikan konsep Enterprise Risk Management di PT Nusantara Rice Mills dengan mengikuti urutan dari langkah-langkah pengelolaan risiko tersebut. Penelitian ini menyediakan informasi yang berguna bagi PT NRM untuk mengelola risiko-risiko yang dihadapinya. Di dalam riset ini, analisa bisnis menunjukkan karakteristik dari bisnis yang dijalankan oleh PT NRM. Sementara itu, risiko-risiko yang diidentifiasi meliputi Risiko Finansial, Pasar, dan Operasional. Di dalam penghitungan risiko, kemungkinan dan efek dari setiap risiko dapat diketahui. Di langkah terakhir, perusahaan dapat mengetahui penganganan risiko yang sesuai untuk masing-masing risiko. Penelitian ini juga menyediakan rekomendasi penting bagi PT NRM, yaitu untuk mengelola risiko menggunakan tindakan pengelolaan risiko yang dihasilkan oleh riset ini. Kata kunci: Manajemen Risiko Perusahaan, Value at Risk, Simulasi Monte Carlo, Mitigasi Risiko vii
FOREWORD
The research of “Enterprise Risk Management, Case Study on PT Nusantara Rice Mills” has been written as one of the main graduation requirement of School of Business Management, Institut Teknologi Bandung. This research is intended to solve the risk management problem in PT Nusantara Rice Mills (PT NRM). Through this research, it is hoped that PT Nusantara Rice Mills can use the result to improve its performance in the future. Besides that, this research is also dedicated to students who are interested and want to study the concept of enterprise risk management. Researcher would like to thank Allah SWT, for His blessing and gift. Researcher also would like to thank all people who give their help and contribution to this research, so that researcher can finish this research optimally and on time:
Researcher’s beloved family; Father, Mother, and Sisters who always give support, understanding, and encouragement during the making of this research. Dr. Ir. Sudarso Kaderi Wiryono, as the Final Project Counselor, for his great teaching of risk management concept, methods, and techniques. Iscrohmani Murtaqi, as researcher’s Academic Counselor who has given her guidance since the first year of researcher’s study. All of my friends in SBM, especially them who are in the same topic and counselor with the researcher, Anies Setyaningrum, Eureka, Irina Nurhapsari, Nadia Anindita, Yohanes Edward, Dias Widya Ramadhan, and Mahayuhadi Fajar Susetyo for their full support and assistance. All of SBM lecturers and staffs, especially Mr. Iwan, Mr. Yayat and Mrs. Ikum, without them the researcher will not be able to know and complete the administrative matter. And, other parties that help the researcher finish this research, whose name cannot be mentioned here.
Researcher realized that this research is far from the word “perfect” and still need many improvements and recommendations from various parties. Lastly, researcher hoped that this research would give big contribution for many people.
Bandung, 26 August 2008 Researcher,
Apricianita Kusumo
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LIST OF CONTENTS
VALIDATION PAGE.............................................................................. iii ABSTRACT .............................................................................................. v ABSTRAKSI........................................................................................... vii FOREWORD ........................................................................................... ix LIST OF CONTENTS ............................................................................. xi LIST OF FIGURES............................................................................... xvii LIST OF TABLES ................................................................................. xix LIST OF APPENDIX............................................................................. xxi CHAPTER I .............................................................................................. 1 INTRODUCTION..................................................................................... 1 1.1 Background ..................................................................................... 1 1.2 Main Problem.................................................................................. 2 1.3 The Importance of the Problem Solving ......................................... 3 1.4 Problem Limitation and Assumption .............................................. 3 1.5 Writing Structure............................................................................. 3 CHAPTER II ............................................................................................. 5 LITERATURE STUDY............................................................................ 5 2.1 The Concept of Risk........................................................................ 5 2.2 Financial Risk.................................................................................. 5 2.2.1 Liquidity Risk........................................................................... 5 2.2.2 Credit Risk................................................................................ 6 2.2.3 Interest Rate Risk ..................................................................... 6 2.2.4 Foreign Exchange Risk ............................................................ 6 2.2.5 Inflation Risk............................................................................ 7 2.3 Market Risk ..................................................................................... 7 2.4 Operational Risk.............................................................................. 7 2.4.1 People Risk............................................................................... 8 2.4.2 Process Risk ............................................................................. 8 2.5 Traditional to Enterprise Risk Management (ERM) ....................... 8 2.6 The Framework of ERM According to COSO................................ 9 2.6.1 Achievement of Objectives .................................................... 10 xi
2.6.2 Activities in the Entity............................................................ 10 2.6.3 Interrelated Components ........................................................ 10 2.6.4 Relationship of Objectives and Components ......................... 11 2.7 Risk Identification ......................................................................... 12 2.8 Risk Assessment............................................................................ 13 2.8.1 Value at Risk (VaR) ............................................................... 13 2.8.2 Monte Carlo Simulation ......................................................... 15 2.8.3 Probability Distributions ........................................................ 16 2.8.4 Risk Mapping ......................................................................... 16 2.9 Risk Management.......................................................................... 17 CHAPTER III.......................................................................................... 19 RESEARCH METHODOLOGY............................................................ 19 3.1 Research Methodology.................................................................. 19 3.2 Research Steps............................................................................... 20 CHAPTER IV ......................................................................................... 23 DATA COLLECTION AND ANALYSIS ............................................. 23 4.1 Analyzing the Business of PT NRM ............................................. 23 4.1.1 Company Profile .................................................................... 23 4.1.2 Company Activities................................................................ 24 4.1.3 Factory Location .................................................................... 24 4.1.4 Factory Capacity .................................................................... 24 4.1.5 Production Process ................................................................. 25 4.1.6 Line Business Characteristic .................................................. 25 4.1.7 Business Function .................................................................. 26 4.1.8 Existing Risk Management and Attitude towards Risk ......... 26 4.2 Risk Identification ......................................................................... 27 4.2.1 Financial Risk......................................................................... 27 4.2.2 Market Risk ............................................................................ 27 4.2.3 Operational Risk..................................................................... 28 4.3 Risk Assessment............................................................................ 29 4.3.1 Credit Risk.............................................................................. 29 4.3.2 Liquidity Risk......................................................................... 31 4.3.3 Currency Risk......................................................................... 33 4.3.4 Sales Price Risk...................................................................... 36 4.3.5 Staff Coordination Risk.......................................................... 37 xiii
4.3.6 Risk Summary and Matrix ..................................................... 39 4.4 Risk Management.......................................................................... 40 4.4.1 Avoid...................................................................................... 40 4.4.2 Control.................................................................................... 41 4.4.3 Transfer .................................................................................. 42 4.4.4 Retain ..................................................................................... 43 CHAPTER V........................................................................................... 45 CONCLUSION AND RECOMMENDATION ...................................... 45 5.1 Conclusion..................................................................................... 45 5.2 Recommendation........................................................................... 46 REFERENCES........................................................................................ 47 APPENDIX ............................................................................................. 49
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LIST OF FIGURES
Figure 2.1 The ERM Framework (COSO: 2004).................................... 11 Figure 2.2 The Historical Method of VaR .............................................. 14 Figure 2.3 The Monte Carlo Simulation Method of VaR ....................... 15 Figure 2.4 Risk Matrix ............................................................................ 17 Figure 3.1 Research Methodology .......................................................... 19 Figure 4.1 PT NRM Organization Structure ........................................... 23 Figure 4.2 Business Function of PT NRM.............................................. 26 Figure 4.3 Histogram of Credit Risk Simulation for Probability............ 30 Figure 4.4 Histogram of Credit Risk Simulation for Severity ................ 30 Figure 4.5 Histogram of Liquidity Risk Simulation for Probability ....... 31 Figure 4.6 Histogram of Liquidity Risk Simulation for Severity ........... 32 Figure 4.7 Histogram of Currency Risk Simulation for Probability ....... 33 Figure 4.8 Histogram of Currency Risk Simulation for Severity ........... 34 Figure 4.8 Delta of USD/IDR (0.00010101 as Base).............................. 34 Figure 4.9 Histogram of Sales Price Risk for Probability....................... 36 Figure 4.10 Histogram of Sales Price Risk for Severity ......................... 36 Figure 4.11 PT NRM Risk Matrix .......................................................... 40
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LIST OF TABLES
Table 2.1 Business Risk Taxonomy ........................................................ 12 Table 4.1 PT NRM Financial Risk Identification ................................... 27 Table 4.2 PT NRM Market Risk Identification....................................... 27 Table 4.3 PT NRM Operational Risk Identification (People Risk) ........ 28 Table 4.4 PT NRM Operational Risk Identification (Process Risk) ....... 29 Table 4.5 Currency Risk Severity Calculation........................................ 35 Table 4.6 PT NRM Risks Summary........................................................ 39 Table 5.1 PT NRM Risks Level Summary ............................................. 45 Table 5.2 PT NRM Risks Management Summary.................................. 46
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LIST OF APPENDIX
APPENDIX A ......................................................................................... 51 FINANCIAL RISK ................................................................................. 51 APPENDIX B ......................................................................................... 54 MARKET RISK...................................................................................... 54 APPENDIX C ......................................................................................... 55 OPERATIONAL RISK (PEOPLE) ........................................................ 55 APPENDIX D ......................................................................................... 61 OPERATIONAL RISK (PROCESS)...................................................... 61 APPENDIX E.......................................................................................... 74 FINANCIAL PERFORMANCE............................................................. 74
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