implementation of risk management and the effects on performance improvement of pt ksi

8/11/2019 Implementation of Risk Management and the Effects on Performance Improvement of Pt Ksi

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1880

THE INDONESIAN JOURNAL OF

BUSINESS ADMINISTRATION

Vol. 2, No. 15, 2013:1880-1887

IMPLEMENTATIONOFRISKMANAGEMENTANDTHEEFFECTSON

PERFORMANCE

IMPROVEMENT

IN

PT

KRAKATAU

STEEL

BudiRahmatandSudarsoKaderiWiryono

SchoolofBusinessandManagement

InstitutTeknologiBandung,Indonesia

[email protected]

AbstractChangesinthebusinessenvironmentisincreasinglyrapidlywithincreasingcompetitionlevelscause

theappearanceofavarietyofbusinessrisksthatcouldaffectthecompany'sperformance.Effortstosecurethe

achievement of the goals and targets of the business, these risks need to be managed in a systematic,

continuous and integrated.Application of the concept of risk management should be integrated with the

company'sstrategyandperformancemanagementforallstrategicplans,tacticalplansandoperationalplans

contain inherent risks thatneed tobemanagedproperly.Through theMinisterialRegulationNo.SOE.PER

01/MBU/2011,Minister

of

state

mandates

that

all

state

owned

building

and

implementing

risk

management

programsinanintegratedcorporationwhichisanintegralpartofthepracticeofgoodcorporategovernance.

ThefinalprojectisareviewoftheapplicationoftheconceptofriskmanagementinPTKrakatauSteel(Persero)

Tbk., Evaluating its impact on corporate performance, analyze the causes of the problems and propose

improvementsnecessaryfortheapplicationoftheconceptofriskmanagementhadapositive impacton the

effectivenessoftheachievementofcorporategoals.Basedonthereviewandevaluation, it isknownthatthe

applicationofriskmanagementinPTKrakatauSteel(Persero)Tbk.hasnotbeenimplementeduniformlybyall

organizational units. In most of the organizational unit, found the lack of continuity between the risk

management cycle. Process repeated measurements of risk level has not been run periodically, so the

effectivenessoftheriskmitigationmeasuresthatdonotscalable.Riskidentificationprocessisnotyetaligned

witheffortstosecuretheachievementofpredeterminedperformancetargets.Therefore,theapplicationofrisk

managementtobeintegratedwiththecompany'sperformancemanagementsystem.

Keywords:PT

Krakatau

Steel,

risk,

risk

level,

risk

mitigation,

key

performance

indicators.

1.

Introduction

PT.KrakatauSteelisaStateOwnedEnterprisewhichstarteditsoperationin1977. Itmanufactures

steel. Today,PT.KrakatauSteel(Persero)Tbk.hasproductioncapacityof2,45Mtonperyear. With

10subsidiaries,PT.KrakatauSteel(Persero)Tbkhasdiversifieditsbusinessintosupportingbusiness

units such as downstream steel product (pipes, profile, etc), utilities (water, power plant),

infrastructure (ports, industrial estates), technical services (construction, engineering), information

technology and hospitals. On November 10th

2010, with the uncertainty in market condition, PT.

Krakatau Steel (Persero) went public and did initial public offering at Indonesia stock market. In

2011,PT.

Krakatau

Steel

(Persero)

Tbk

recorded

Rp.

17,9

Trevenues

and

Rp.

1.02

Tnet

profit.

The

total asset of PT.Krakatau Steel group in 2011 is Rp. 21,5T (source:2011FinancialReport ofPT.

KrakatauSteel(Persero)Tbk).

PT.KrakatauSteel(Persero)Tbk.hascommittedtoapplymanagementsystemincompliancetoGood

Corporate Governance principles to support the company in achieving its goal and objectives and

alsomaintaininggoodrelationshipwithallstakeholders. Inthefastchangingbusinessenvironment,

companies are required to beable to identify the likelihood and impact of risks in order to better

anticipate the risk so that it will not halt corporate operation for both short term and long term

activities. Sales and production performance data from 2007 to 2011 did not show significant


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RahmatandWiryono/ TheIndonesianJournalofBusinessAdministration,Vol.2,No.15,2013:18801887

1881

improvement. Infactonaverageitshowsadecreasingtrend. Thisconditionshowsacontradictory

conditionwiththeobjectiveofimplementationofriskmanagement.

2.

Literature

Review

Rowe(1997)definedriskaspotentialemergingunexpectedconsequenceeventofanactivity. Inline

with the risk definition of Rowe (1997), Sim Siegel (2011,page18) mentioned three fundamental

aspectsof

risk,

they

are:

1. Riskisuncertainty.

2. Riskincludespositivesideofchangingsituation.

3. Riskisadeviationexpectedidealcondition.

ERM is a process effected by an entitys Board of Directors, management and other personnels,

appliedinstrategysettingacrosstheenterprise,designedtoidentifypotentialeventsthatmayaffect

theentityandmanageriskstobewithinitsriskappetite,toprovidereasonableassuranceregarding

the achievement of entity objectives (COSO Committee of Sponsoring Organization of the

TreadwayCommission,2004).

RiskManagementisaprocesscycleofidentification,analysisandquantificationofresponsestorisk,

which is performed continuously and incessantly as integral part of corporate management. Risk

Management is an iterative process, which if it is systematically performed, that will result in

continuous

improvement

in

decision

making

and

performance

improvement

process.

To be effective, risk management implementation shall involve all organization lines and be

performedharmoniouslywithcorporatebusinessstrategy.Toperformthatthecorporateshallhave:

(i) clear business strategy, (ii) effective risk management framework, (iii) strong and adaptiveto

businessenvironment.

Risk Management is not planned to eliminate risk of an activity at all, but more intended to build

awarenessofrisksfaced,positiveornegativeones,andtohelpthestakeholderscalculateriskand

manageitefficiently. ChapmanandWard(1997)revealedtheusesofriskmanagementasfollows:

(a) Riskisdefined earlierevenbeforeactivitiesbegin.

(b) Tosupportobjectivedecisionmakingprocess.

(c) Toimprovebusinessplanwithmoreimaginativescenario(Whatif).

(d) Definitionandbusinessstructure aremonitoredobjectively.

(e)

Alternativeplanismadewithresponseofriskconsideration.

(f)

Toimaginativelydevelopresponsealternative.

(g)

Tobuildriskprofilefornextprojectimprovement.

Tomanageriskmorerationally,systematicallyandmeasurably,andtogiveusefordecisionmaking

process,riskshallbemanagedthroughprocessesasfollows:

1. Knowingandunderstandingfacedrisks.

2.

Measuringrisklevel.

3.

Decidingonresponsesorthefollowupaction.

4. Ensuringthatdecisionabouttakenstepsisstillrelevanttothedevelopmentoffacedsituation.

3.

Conceptual

Framework

InERMconcept,risk isallconditionsnotsuitablewithexpectedcondition, includingdownsideand

upside.Tobeeffective,riskmanagementimplementationshallinvolveallorganization linesandbeperformedharmoniouslywithcorporatebusinessstrategy.Toperformthatthecorporateshallhave:

(i) clear business strategy, (ii) effective risk management framework, (iii) strong and adaptiveto

businessenvironment.

RiskManagementisaprocesscycleofidentification,analysisandquantificationofresponsestorisk,

which is performed continuously and incessantly as integral part of corporate management. Risk

Management is an iterative process, which if it is systematically performed, that will result in

continuous improvement in decision making and performance improvement process. Risk

Management is not planned to eliminate risk of an activity at all, but more intended to build


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awarenessofrisksfaced,positiveornegativeones,andtohelpthestakeholderscalculateriskand

manage it efficiently. ERM frame work is a structure that enables risk management process to be

performedeffectively.

Measuring risk level is performed by measuring event probability/likelihood and estimating the

impactvaluewhentheriskreallyoccures.Themeasurementofprobabilityandestimatingmaterial

impactisperformedinaccordancewiththefollowingguidance.

Figure1.ProbabilityofRiskOccures

Figure2.RiskImpact

The measurement of risk level is performed based on the result of risk probability and impact

measurement. Determiningrisklevelisperformedaccordingtothefollowingriskmatrix.

Figure3.RiskMatrix


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According to risk level classification used in PT Krakatau Steel (Persero) Tbk., identified risk are

categorizedintofourrisklevelwiththescorefollows:

Table1.RiskLevel

NO

LIKELIHOOD

IMPACT

RISK

LEVEL

SCORE

1.

VeryBig 5 Loss 3 Extreme 15

4

VeryBig

5

HighLoss

4 Extreme

20

VeryBig 5 Disaster 5 Extreme 25

Big 4 HighLoss 4 Extreme 16

Big 4 Disaster 5 Extreme 20

Moderate 3 HighLoss4 Extreme12

Moderate 3 Disaster 5 Extreme 15

Small 2 Disaster 5 Extreme 10

2.

VeryBig 5 Unsignificant

1High 5

3

VeryBig 5 LowLoss 2 High 10

Big 4 LowLoss2 High8

Big 4 Loss 3 High 12

Moderate

3

Loss

3

High

9

Small 2 HighLoss4 High8

VerySmall 1 HighLoss 4 High 4

VerySmall 1 Disaster 5 High 5

3.

Big 4 Unsignificant

1Moderate 4

2Moderate 3 Unsignificant

1Moderate 3

Small 2 Loss 3 Moderate 6

VerySmall 1 Loss3 Moderate3

4.

Moderate 3 Unsignificant

1Low 3

1

Small

2

Unsignificant

1Low 2

VerySmall 1 Unsignificant

1Low 1

Small 2 LowLoss 2 Low 4

VerySmall 1 LowLoss 2 Low 2

Theactionplanofriskresponseandmitigation isarrangedaccordingtoprioritybasedonrisk level

andcosteffectivityandefficiencyconsideration. Yetintheimplementation,notallmitigation plan

having been arranged can completely be realized, so that it impacts on performance target

achievementset. Forperformingthat,estimateproblemsolvingrateofriskmitigationplanhasbeen

arrangedasfollows:


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Table2.RealizationofMitigationPlan

NO

MITIGATION

PLAN

STEPS

%

Realization

1. RiskMitigationPlanisperformedasplannedby allrelatedwork

units.

100

2. MostofrelatedworkunitshaveperformedRiskMitigationPlan

asplanned.

90


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happening in the corporate. Therefore, recommendation or improvement suggestion given are

expectedtobeconcretealternativesolutionforactualproblemfacedbythecorporate.

According to Work Instruction Unit Objectives Achievement Report No. PER/3/PK/001, corporate

performancerealizationispercentageofthesettargetandthemaximumrealizationis120%ofthe

target. If the achievement of realization is far above the set target, the maximum achievement

numberreportedwillbe120%. Ontheotherhand, iftheachievementnumberisfarbelowtheset

target,theminimumachievementnumberreportedwillbe0%.

4.

Analysis

of

Business

Situation

Bord of Directors of PT Krakatau Steel (Persero) through its decree No. 06/C/DUKS/Kpts/2007

declares the Enterprise Risk Management (ERM) implementation. Such implementation includes

activitiesas follows:

a. Performingriskidentificationineverycorporatebusinessactivity.

b.

Performingriskanalysisibymeasuring

c. Performing risk analysis by measuring impact and probability (likelihood) of risk events and

comprhehensiveriskassessment.

d. Performingriskplanandcontrolthatmaydisturbsignificantlycorporatebusinessactivities.

e. Monitoringriskcontrolactivitiescontinuouslyandsuccessively.

f.

Performing

communication

process

and

report

of

every

risk

management

activity

Accordingtosalesandproductiondatafrom20072011therewasaconsistentsalesandproduction

decrease.Corporateleaders,especially,needtofindouttherootcauseofproblemtobeabletofind

the solution, so that similar problem will not happen in the future. According to data about and

analysis of corporate performance and risk management implementation during 20092011 there

wasadisharmonybetweensomebusinessfunctionworkprogramandfacedbusinessrisks. Ithadan

effectonworkprogrameffectivity inachievingperformancetargethavingbeenset.Somebusiness

function work program were not risk business responses or mitigation faced.

On the other hand, business function, risk mitigation step was not in harmony with the effort to

secure performance target having been set. It took place because from risk identification process

until risk mitigation planning, risk mitigation plan was carried out not as an effort to secure

performance target having been determined. Such condition happened because until 2011 risk

managementimplementationhadyetbeenintegratedwithcorporatemanagementsystem.Withits

experience in steel industry field, the company should have anticipated and mitigated generic

businessrisks.Hadtheriskmitigatingandanticipatingstepsperformedconsistentlyandinvolvedall

linked work units, corporate would have not had such continuous performance decrease as

happenedduring20072011.

5.

Conclusion

Fromthecoefficienttable,significantvalue (0.00) issmallerthan0.05,whichmeans Realizationof

Risk Mitigation, and Achievement of KPI is significantly correlated at the level of 0.05. (Ho

(RealizationofRiskMitigationdoesnotaffectAchievementofKPI)isrejectedandHa(Realizationof

RiskMitigationaffectsAchievementofKPI)isaccepted).

Table3.StatisticDescriptionofKPIAchievementandRealizationofRiskMitigation

Mean DeviationStd. N

AcievementofKPI 90.94 27.83 47

RealizationofRisk

Mitigation338.66 25.77 47


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Achievement of KPI is positively and significantly related to Realization of Risk Mitigation with the

correlationvalueamountto0.611.BasedonThemagnitudeofthecorrelationcoefficientcriterion,

independent variable and dependent variable are strongly linear related. It is supported by

probabilityvalueamountto0.000


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1887

PT. KrakatauSteelWebsite,www.krakatausteel.com

PT. Krakatau Steel, LaporanManajemen Risiko PT Krakatau Steel Tahun 2009, 2010, unpublished

document.


document.


document.

PT.

Krakatau

Steel,Laporan

Manajemen

Risiko

PT

Krakatau

Steel

Tahun

2012,

2013,

unpublished

document.

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Scorecard,Boston,USA:HarvardBusinessSchoolPress.

Kaplan, Robert, S. & Norton, David, P., 2001, The Strategy FocusedOrganization :How Balanced

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