Determinants of operational risks and losses in manufacturing firms in Kenya

Abstract

Risk management is the practice of creating economic value in a firm by using financial instruments to manage exposure to risk, particularly credit risk and market risk. Despite the innovations in the manufacturing sector, operational risk is still the major single cause of firm failures. Risks are uncertainties resulting in adverse variations of profitability or in losses. Various risks faced by manufacturing firms include; market risks, interest rates risk, liquidity risk and operational risk. Studies in Kenya have only focused on risk management practices of firms in general without being specific on the operational risk management practices of manufacturing industry. Descriptive research sought to establish factors associated with certain occurrences, outcomes, conditions or types of behavior. A target population is one that the researcher wants to generalize the result of the study. There were 60 manufacturing firms in Kenya. These formed the target population. The study covered 30 manufacturing firm in Kenya which was in operation as at 31st December 2012 for data consistency. Primary sources was used to collect data. The primary data was collected using questionnaires. The data collected was run through various models so as to clearly bring out the determinants of operational risks and losses in manufacturing firms in Kenya. The study revealed that the determinants of operational risks and loses in manufacturing firms were governance, strategy, policy, periodic evaluation and organization structure The study also revealed that a unit increase in governance would lead to decrease in operational risks and loses in manufacturing firms. The study further established that a unit increase in strategy would lead to decrease in operational risks and loses in manufacturing firms. The study also established that a unit increase in policy would lead to decrease in operational risks and loses in manufacturing firms. The study found that a unit increase in periodic evaluation would lead to decrease in operational risks and loses in manufacturing firms, it was further revealed that a unit increase in organization structure would lead to decrease in operational risks and loses in manufacturing firms. The study recommends that in order to effectively manage operations and reduce operational risks the management team needs carefully identify all the risks it may fall vulnerable of and establish the appropriate mechanisms to curb unexpected risks whenever they pop up. Risk management will help to reduce surprises, improved planning, enhance performance and effectiveness and improved relationships with stakeholders. The study recommends that Corporate Social Responsibility is important because businesses are based on trust and foresight. Establishing and keeping trust with customers, communities and regulators isn’t simple and can be easily damaged or lost. To be successful in the long-term, companies need to think beyond what’s affecting them today to what’s going to happen tomorrow. This isn’t just about addressing changes to technology or the needs of customers, but also taking into account alterations in social, environmental and governance issues.