Chapter 18 presented special risk management issues with Blue Wood Chocolates, and chapter 19 presented various financial risks at Kilgore Custom Milling. If Blue Wood Chocolate and Kilgore Custom Milling are to develop a risk management framework, who should lead the process at each company? Should a Chief Risk Officer (CRO) be appointed? If so, to whom should he/she report and have access to? How could smaller companies without the resources for a dedicated CRO deal with ERM? What is the role for the board in such a process?

To complete this assignment, you must do the following:

A) Create a new thread. As indicated above, if Blue Wood Chocolate and Kilgore Custom Milling are to develop a risk management framework, who should lead the process at each company? Should a Chief Risk Officer (CRO) be appointed? If so, to whom should he/she report and have access to? How could smaller companies without the resources for a dedicated CRO deal with ERM? What is the role for the board in such a process?

ANSWER ALL OF THE QUESTIONS ABOVE IN YOUR THREAD

B) Select AT LEAST 3 other students’ threads and post substantive comments on those threads, evaluating the pros and cons of that student’s recommendations. Your comments should extend the conversation started with the thread.

ITS 835
Chapter 18

Blue Wood Chocolates
Enterprise Risk Management

Professor Michael Solomon

Introduction

•

Background

• Market overview
• Blue Wood financial performance
• Conclusion

Background

• U.S. Manufacturer of chocolate products
• Privately owned (family)

• New CFO
• Outsider

• Brought in to stabilize financial performance

• Blue Wood risk management practice in doubt
• Banks wondering if RM gaps are causing unstable finances

• Considering taking action

• Internal politics and conflict

Market Overview

• Growing market
• Major competitive factors

• Large producers

• Brand recognition / reputation

• Cocoa markets overview
• Sugar markets overview
• Milk markets overview

Blue Wood Financial Performance

• Profitability measures worse that competitors
• Lots of internal finger pointing

• Deteriorated cash position
• Currently borrowing against revolving line

• Retained earnings falling
• Substantial investments

• In case cash flow couldn’t cover dividend payments

• Potential $10 million lawsuit
• Risky entrance into currency hedges and futures

Conclusion

• Business underperforming
• Immediate action is necessary to respond to banks
• CFO requires

• Overall view of corporate objectives

• Major risks facing the company

• Must have support from the top
• After initial pass

• Implement ERM

ITS 835
Chapter 19

Kilgore Custom Milling
Enterprise Risk Management

Professor Michael Solomon

Introduction

•

Background

• The management team
• The company
• The new contract
• The financial risk management meeting

Background

• Kilgore Custom Milling
• Small private manufacturer

• Power window assemblies

• Based in southern Ontario, Canada

• Pursued contracts to supply plants in the U.S.
• Successful in negotiating a contract with Japanese manufacturer

• Previous international contracts resulted in loss
• Due to currency volatility

The Management Team

• Owner and CEO
• Steve MacLinden

• Left day-to-day operations for the rest of the team

• Manufacturing and Plant operations
• Rory Sullivan

• Sales and Client relationships
• Casey Dobblestyn

• Treasurer and CFO
• Cathy Williams

The Company

• Privately owned
• 100% by Steve MacLinden

• Planning to retire in 5 – 10 years

• Main focus is cash flow management
• Concerns with currency related cash flow issues
• Additional concern about inflation differences

• Between U.S. and Canada

The New Contract

• Dramatically increase sales
• Over 100% for 5 years

• Complex and exacting specifications
• All proceeds in U.S. dollars

• Kilgore must manage financial risk

• Contract could be extended for 3 years
• But at the same price, benefitting the buyer

The Financial Risk Management
Meeting

• U.S. and Canadian dollars near par
• Caused concern over U.S. competition

• Multiple options to deal with currency risk
• Long term swap contracts
• Short term forward contract
• Currency options

• Management team lack understanding of the options
• More open questions than answers
• Lots more to do …

Student 1:

Risk Management Framework

When coming to Blue Wood Chocolates Company, with both CEO and CRO the company CRO should interact because CEO will know everything about the business should such as company past activities and previous major key decisions that were made. Thus for an organization CFO is new and the CFO will be the part of the future business process and CFO also be interacted with the CRO. While the company implementing ERM then the CRO should lead the company process

(Chu, 2017).

In Kilgore Custom Milling, with all the teams the CRO must have interacted because even Steve MacLinden is the CEO of this company and each department in this company will have their heads such as manufacturing, customer relationship, treasure, sales, etc. So with the team to mitigate risks the CRO should conduct common meetings. Among the management, cash flow concerns, there will be a lack of proper risk mitigation plans where there is clear visibility of the communication gap in both organizations (Hallowell, 2013).

In most of the small business organizations, the management of an organization will mostly make the business expansion and production key decisions. About product designing and business expansion this management has good knowledge but about the company risk mitigation techniques which include inflammation differences, issues related to cash flow, competitive threats, money management, and lawsuits for these the company will have minimal knowledge. In any organization when CRO is appointed then it will help the organization to bring an ownership order in the management and structure. Over the years the organization’s responsibilities of CRO – Chief Risk Officer are evolving continuously. Some of the CRO functions include risk identification and plan to mitigate risks, between the teams of organization key decision making it forms good communication by conducting meetings and periodically updating the risk tolerance levels which indicates the CRO mandatory presence (Lundqvist, 2014).

Reference

s

Chu, C.-P., Hsiao, Y.-L., Cho, C.-M., & Chen, Y.-C. (Cindy). (2017). Applying compound options in logistics enterprise risk management. Journal of Industrial & Production Engineering, 34(2), 135–146. 

https://doi.org/10.1080/21681015.2016.1241307

Hallowell, M. R., Molenaar, K. R., & Fortunato, B. R. (2013). Enterprise Risk Management Strategies for State Departments of Transportation. Journal of Management in Engineering, 29(2), 114–121. 

https://doi.org/10.1061/(ASCE)ME.1943-5479.0000136

Lundqvist, S. A. (2014). An Exploratory Study of Enterprise Risk Management: Pillars of ERM. Journal of Accounting, Auditing & Finance, 29(3), 393–429. 

https://doi.org/10.1177/0148558X14535780

Student 2:

HI Everyone,

Blue Wood chocolates has following risks. The past couple of years and quarterly results of the company showed a mixed financial performance that is fluctuating. There was no coordination across different departments like operations, sales and purchasing at Blue wood. To understand the reasons for the company’s failure there were no proper reports. There were no proper strategies for purchasing Coca and sugar. When compared with the competitors, Blue Wood’s profit measures, gross margin was lower. And due to recent financial results, the board members never agreed on the objectives and business strategy.  To solve these problems there should be an ERM framework. And as there is no enough time for the trials, no experienced people to implement and make the board understand about ERM, the Chief Risk Officer is needed at Blue Wood. keeping in mind the situation at Blue Wood chocolates, the CRO at Blue woods should report to the Sally (CFO) and closely work with the board to explain how the existing risks can be handled as they are the decision-makers.

And the following are the risks at Kilgore Custom Milling. Kilgore has already experienced losses when it supplied to US-based plants. With the new contract, Kilgore can get into losses if there are any risks in managing, producing and exchange rates. Kilgore also had a Cashflow problem. Th Cathy’s team doesn’t have answers to some of the questions and Steve was not happy with the Solutions or the options provided by Cathy’s team . Cathy also had various questions like products that would give them better exchange rate, How they can get the reports and how the analysis could help in ERM framework. To provide better options to Steve and answer the questions that Cathy has, a CRO should be appointed at Kilgore. Understanding the situations at Kilgore Custom Milling, the CRO should report to Steve (CEO) and closely work with Cathy(CFO) as She has a better understanding of the Financial situation at Kilgore and Cathy had some questions were she needed the answers. Reporting to CEO would allow CFO.

If the smaller companies don’t have a CRO dedicated with ERM than the Chief Financial Officer would be the better option to perform these duties. As the CFO’s have a very good understanding of the existing risks in the organization. At Blue Wood Chocolates Sally CFO was trying to implement the ISO 31000 ERM framework. But, due to lack of time she was not able to conduct the trials and difficulty in making the Board understand the ERM which made her drop the implementation of ERM.

Student 3:

Blue Wood chocolates carries out business internationally and domestically and has its factories located in western United States. The chief financial officer of Blue Wood realized of having high number of financial issues with the business and is responsible to lead the risk management framework. Additionally, Kilgore is a private manufacturer of automobile power window assemblies in Ontario, Canada. An operation manager is appointed to develop a risk management framework for Kilgore. Both the firms should appoint a Chief risk officer (CRO) which is dedicated towards managing risk of the companies.

              The new Chief Risk Officer at Kilgore mining and Blue Wood Chocolates should report to the company’s chief executive officer (CEO). Such smaller firms should have their business backed up with insurance in case of any risks and they should also take care of company’s growth and competitiveness.
Therefore, in case if these company’s fail to appoint a dedicated Chief Risk Officer (CRO) the insurance company would provide coverage for any services / infrastructure that was damaged. The board of directors aims to manage the risk function of a company and justifies the use of ERM in an organization. The board establishes whether a firm responds appropriately to the significant risks (Committee of Sponsoring Organizations of the Treadway Commission, 2009).

 
Reference

Committee of Sponsoring Organizations of the Treadway Commission. (2009). Documents. Retrieved

from COSO: https://www.coso.org/documents/COSOBoardsERM4pager-

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