Risk and Risk Management

Risk and Risk Management
Basic Concepts
Keith J. Crocker
University of Michigan Business School
“This has got to be the worst day of my life,” observed William Clay Ford Jr., Ford Motor Company Chairman, as he contemplated the February 1999 natural gas explosion in boiler number six that had just leveled part of the River Rouge powerhouse in Detroit, Michigan. The disaster killed 6 people and seriously injured 14, and cut off power to the 1,100 acre facility.
While Ford Jr.’s remarks were directed toward the human dimension
of the tragedy, from a corporate standpoint the prognosis must have appeared equally sobering. The Rouge complex powerhouse—the centerpiece of Henry Ford’s dream of building entire cars in a single location—had supplied electricity, compressed air, mill water, and steam to six assembly and parts plants employing 10,000 workers, and also to the independently owned Rouge Steel plant. Although an engineering
marvel of its time, the concentration of production at River Rouge had precipitated a risk manager’s worst nightmare, as the effects of the integrated plant’s shutdown rippled through Ford’s internal supply
network.
First hit was Rouge’s own Mustang assembly plant, which had been working overtime with two 10-hour shifts daily cranking out the popular sports compact. Next came Rouge’s metal stamping plant, supplying
metal parts (fenders and similar products) to 16 of Ford’s 20 North American plants. Results were predictable. Shifts were cut from 8 hours to 4 hours at three Midwest assembly plants, and lost production
at Rouge’s frame plant resulted in the elimination of scheduled overtime at truck plants in Kansas City, Missouri; Norfolk, Virginia; and Oakville, Ontario.
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Even at these reduced levels, production was supported only by the buffers of existing inventories and supplies in transit that, once exhausted, would necessitate plant shutdowns. And a previously planned $240 million replacement powerhouse would not be completed
for at least a year (Financial Times 1999).
Risk is endemic to our personal, as well as professional, experiences.
Every time we decide to cross the street or ascend the stairs in our homes, we are making personal decisions involving risks and their management. How we handle these situations has an important impact on the quality (and, in many cases, the length!) of our lives.