Understand the Project

Brad's company manufactures customized novelty items such as snow globes, tote bags, key chains, and other impulse-purchase and promotional items. The company ships orders directly from its factories to retail outlets, its primary customer base. More than 40 percent of sales come from small gift stores located in tourist areas in Florida. Almost 60 percent of sales are spread among various retailers in thirteen other states. The company has two factories, one in St. Petersburg, Florida, and the other in Phoenix, Arizona. Business is good and has been growing at almost 8 percent per year for the past seven years. As Brad explains, "In order to sustain this rate of growth, we need to expand our manufacturing capabilities.

"The board of directors has decided that neither outsourcing the manufacturing nor moving the function offshore is the right move. The directors believe that outsourcing requires a set of skills we don't have and that maintaining product quality offshore is too dicey. The board decided to use the same expansion strategy that the company has used for more than eighty years—to own and operate its own manufacturing facilities.

"A team was put together to investigate options, and after six months, it recommended three options: Athens, Georgia; a second Florida location, this one outside Jacksonville; and Bushnell, Illinois, a small town about six hours' drive south of Chicago. I was told to recommend a location from a risk management perspective. I don't know which location my peers in distribution, transportation, finance, quality control, marketing, sales, and employee relations plan to recommend—they have their own data and standards. But I sensed that the prevailing view among members of the executive committee is that we should go with the Florida location. We're a Florida corporation, so it's loyal to go with what we know. According to my data, however, that's not the smartest move.

"My recommendation that we select Georgia for the new factory location is not based on my personal preference; it's an educated opinion. My analysis is objective and comprehensive, whereas I think other departments may use more limited assessments.

"In my view, different risks require different methods of evaluation, and trying to use only one method of analysis may create a false sense of security. Also, for some risks, like worker comp claims, a lot of historical data exist, whereas for other risks, like those associated with building a new factory, no such data might exist. Additionally, some risks, such as fraud, can't be methodically analyzed.

"I have spent three months identifying which data we need to look at in order to evaluate risk properly and then researching the data. I created a weighted evaluation tool known in my industry as a stochastic simulation, and based on my analysis using this tool, it is my view that we should build our new factory in Georgia."

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