As an internationally operating logistics company, we are faced with numerous changes. Our aim is to identify the resulting opportunities and risks at an early stage and to manage them with the goal of achieving a sustained increase in enterprise value. Our Group-wide opportunity and risk control system facilitates this aim. Each quarter, our managers estimate the impact of future scenarios and evaluate the opportunities and risks in their departments. Risks can also be reported at any time on an ad hoc basis. The approvals required by the risk management process ensure that management is closely involved at different hierarchical levels.
Our early identification process leads to uniform reporting standards for risk management in the Group. We make constant improvements to the IT application used for this purpose. We also use a Monte Carlo simulation for the purpose of aggregating risk in standard evaluations.
This stochastic model takes the probability of occurrence of the underlying risk and rewards into consideration and is based on the law of large numbers. For each risk, one million randomly selected scenarios are combined with each other from the distribution functions for the individual risks. The resulting totals are shown in a graph of frequency of occurrence, which thus acts as an indication of the probability of budget deviations for each unit reviewed. The graph indicates a smaller range between the absolute extreme scenarios within which the earnings for the division have a high probability of falling. The following graph shows an example of such a simulation:
The most important steps in our opportunity and risk management process:
Identify and assess: Opportunities and risks are defined as potential deviations from projected earnings. Managers in all divisions and regions provide an estimate of our opportunities and risks on a quarterly basis and document relevant actions. They use scenarios to assess best, expected and worst cases. Each identified risk is assigned to one or more managers, who assess it, monitor it, specify possible procedures for going forward and then file a report. The same applies to opportunities. The results are compiled in a database.
Aggregate and report: The control units responsible collect the results, evaluate them and review them for plausibility. If individual financial effects overlap, they are noted in our database and accounted for in the aggregation. After being approved by the department head, all results are passed on to the next level in the hierarchy. The “aggregate and report” step is complete when Corporate Controlling reports to the Group Board of Management on the significant opportunities and risks as well as any overall impact each division might experience. In addition, opportunities and risks are aggregated for key organisational levels. We use two methods for this. In the first method, we calculate a possible spectrum of results for the divisions and add the respective scenarios together. The totals for “worst case” and “best case” indicate the total spectrum of results for the division in question. Within these extremes, the total “expected cases” shows current expectations. The second method involves use of a Monte Carlo simulation, the results of which are regularly included in the opportunity and risk reports to the Board of Management at the divisional level.
Overall strategy: The Group Board of Management determines fundamental opportunities and risks to which the divisions are exposed and indicates how these can be managed successfully. The reports made by Corporate Controlling provide a regular basis of information for the overall management of opportunities and risks.
Operating measures: As part of the strategy, the divisions determine the measures to be used to take advantage of opportunities and manage risks. They use cost-benefit analyses to assess whether opportunities should be taken and whether risks can be avoided, mitigated or transferred to third parties.
Control: For key opportunities and risks, early warning indicators have been defined that are monitored constantly by those responsible. Corporate Internal Audit has the task of ensuring that the Board of Management’s specifications are adhered to. It also reviews the quality of the entire opportunity and risk management operation. The control units regularly analyse all parts of the process as well as the reports from Internal Audit and the independent auditors with the goal of identifying potential for improvement and make adjustments where necessary.