Nucor at the crossroads
Enterprise Risks and Mitigation Mechanisms
Enterprise Risk Sub Category
External Risks Supplier:
1) Unreliable scrap steel
suppliers which has potential for
rising material cost
2) Dependence on outside
vendors to deliver timely
Shareholder – Returns
Not able to upgrade as per the
technological advancements
Operational Plant:
Plant Capacity has been reduced
heavily
People:
1) Mistakes by managers. An
average person put in
management position takes
50% good decisions and good
manager takes 60% good
decisions
2) Lack of involvement in
decision making
3) Outdated skills
Mitigation Mechanism at
Nucor
Nucor had its own independent
supplier which delivered in
short times
Setting target of new plants
delivering 25% ROA within 5
years
Nucor invested steadily and
heavily in upgrading its old as
well as new capacity, Nucor’s
own research was applied and
conducted on the factory floor,
metallurgist was responsible for
scanning the scientific and
engineering communities for
new steel technologies
Each plant manager had to
achieve an annual contribution
before corporate overhead of
at least 25% of the net assets
employed in the plant. Manger
would be dismissed for failing
to achieve the target.
Encourage both openness and
risk-taking and let the
managers know that their bad
decisions could have been
better.
Flat organisation structure .
Decentralised as many
decisions as the next level can
manage.
Trained every newly recruited
employee for two months
 resulting in utmost productivity

Financial Maintains strict policy of

Debt Equity structure restricting Debt capital ratio to
less than 30%

2.      Identify the Project related risks and attempt a risk mapping. Make appropriate
assumptions

Risk event Risk driver Risk Mitigator Impact Impact driver Impact
mitigation
Delay in Labour Strikes Incentivise the Loss in Sales is time Keeping buffer
production workforce revenues dependent of in sales
depending on production timeline
production
targets

Dependency Extraction of
on external iron from iron
source of raw ore within the
material company

Aging Adopt to new

Technology technology to
and decrease
breakdown production
time and make
it more
efficient

Bureaucracy in Advance
compliance planning of
filing requests
Threat From 1) Loss of IPR Remove Loss in Sales is Offer price
competition because of factory see out revenues dependent on discount to
company's policy price and bulk customers
policy of quality of and filter
factory view product defective
out. products

2) Use of Improve the

Alternative product quality
materials by by using high
customers, grade steel
plastic,
aluminium and
others
materials

3) better Invest in R&D

quality and technology
products by development
competitors

Loss of market Nucor is not Allocate some Dwindling Higher the Better buying
share spending much portion of stock prices market share, incentives to
on marketing budget for Higher the customers in
marketing stock price terms of
initiatives payment and
bulk buying
discounts
resulting in
improved sales

Inefficient Flat Strict decision Delayed Increased costs Employ

decision organisational making decisions and loss of timelines for
making structure mechanism resulting to market decisions
delayed opportunities
reactions

Inappropriate Allocation of Increase in Project Have buffer

allocation of work based on project completion time included
work past work completion time depends in project
experiences times on efficient timelines
 work allocation
and
completion

Risk Mapping
1
0.9
Probability of impact (Pi)

0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
0.45 0.5 0.55 0.6 0.65 0.7 0.75 0.8 0.85 0.9 0.95
Probability of risk (Pr)

3.  Based on the data given in the case, and the Project risks identified by you, compute the EMV of
loss before and after mitigation. You can make appropriate assumptions where you do not have data.

Before Mitigation

Risks Pr Pi Pr Cost EMV

xPi
R1 Inefficient decision making 0.5 0.6 0.30 10 3
R2 Delay in start of the project 0.9 0.9 0.81 22.5 18.225
R3 Threat from competition 0.8 0.9 0.72 12.5 9
R4 Lack of market 0.7 0.8 0.56 15.5 8.68
Total 38.905
EMV

After Mitigation

Risks Pr Pi Pr xPi Cost EMV

R1 Inefficient decision making 0.3 0.4 0.12 10 1.2
R2 Delay in start of the project 0.7 0.8 0.56 22.5 12.6
 R3 Threat from competition 0.6 0.7 0.42 12.5 5.25
R4 Lack of market 0.5 0.6 0.30 15.5 4.65
Total 23.7
EMV

Assumptions –

Total operating cost = $225

Breakdown repair cost = 10%

225 x 10% = 22.5

Following probabilities will be applicable to appropriate EMV according to the situation.

Nucor’s net worth is around $340 million which shows it has the financial strength to undertake the risk.

Technological obsolescene Lack of awareness Scanning of tech

Low r &D Budget for r and D
Low upgradation Mandate- for upgradation
Customers receptive Working with customers
Marketing product Spreading the unit to too many Be only in single unit
products High quality competition pricing
Too much competition
People risk Attrition
- Working environment
-
Decision making at times Centralization of power Decentralization, decision at
Scare to take decision plant levels, org structure
Too many layers Flat hierarchy level
Slogan of 50-50
25% ROA
Tech. Performance should be
aachieved
No losses and liabilities from
previous projects
Financial risk High leverage equity Debt to equity is 30%
No fresh issues
Project risk Time overrun Billboards for employees
Cost overerun Nucor acted a s contract
 quality manager
Fixed price contract with
incentive
Operations risk Utilisation of One day/weel for maintenance
machinery(breakdown)
Employee
- Absent 1 week bonus gone
- Late coming I day problem gone

Scrap prices went high Centralised purchase to avoid

Electricity prices haggling by different
High wages Set up plants in rural areas
where electricity is inexpensive
Recruit from rural areas

Risk event mitigator impact mitigator

1. Delay in Drop (WFB Project start Project
financial PROJECT) one delay schedule
closure project should be after
2. Raising Take the the finanacial
funds by bankers to closure
loan germany
(r1) Venture
capitalist

Trial runs and Send your Loss of profits Project buffer

commissioning people for 3-6 because of
could be delayed months delay
(r2) intensive Additional
training in cost,say 2
germany weeks
Do pilot plant
trials
Technology NOTHING CAN Investment of Get a 15%
- TsP DOES BE DONE 340 million is discount on
NOT waste less the
WORK(r3) salvageable price(13.5%)
- Other value Have a clause
minimills for liquidated
get Flexibility to damages of
superior incorporate 10%.
technolog new changes Loss of market
y after 2-3 at minimal share(100,000
years (R4) cost tonnes)
- MDM NOTHING CAN TSC will Join hands
COMING BE DONE become with MDM
 UP WITH outdated
BETTER
TECH. (R5)
Manufacturing Constant Cost of Materials
trainng of material lost in salvaged as
employees for breakout) scrap
handling Loss of
profit(say 1 hr
in a week)
Operations
Scrap price Shift to DRI Cost increase Control
increaser(R10) Enter into a by 20% wastage in the
Labour rate long term process by a
increase(R11) contract system of
Backward reward and
integration to penalty
scrap
collection
processing Cost increase
Existing Rewar and
Other production incentive and Cost increase penalty
cost (R12) penalty.
Shift to
alternative
sources of
energy for
electricity
Strategic risk No Sales of Nothing can
ISR setup TSC competition to 900,00$ lost be done
Plant NUCOR except hoping
Sell at variable Nucor is nore they will bleed
cost of say 264$ efficint to death.
Marketing Work with the 100,000 Tapping some
Lukewarm customers tonnes lower other markets
response to flat for sales
construction (R8) Loss of sales of Shift this
Non acceptance of 100,000 production to
flat for automobile tonnes construction
(R9) segment.

EM Calculation (Before Mitigation)

Risks Risk Pr Pi Prx Pi Cost EMV

Delay in R1 0.2 0.2 0.04
Financial
 closure
Trial Run R2 0.4 0.3 0.12
TSP does R3 0.5 0.9 0.45 272000000 122400000
not work
Superior R4 0.3 0.5 0.15 9800000 1470000
tech in 2-3
years
MDM R5 0.2 0.7 0.14 68600000 9604000
coming with
better tech
Breakout R6 0.4 0.4 0.16 15450000 2472000
Reliability R7 0.4 0.8 0.32 735000 235200
Lukewarm R8 0.2 0.4 0.08 9800000 784000
by
construction
Non R9 0.4 0.5 0.20 9800000 1960000
acceptance
by
automobile
Scrap cost R10 0.5 0.5 0.25 18090000 4522500
Other R11 0.1 0.1 0.01 11520000 115200
operating
cost
Other R12 0.1 0.9 0.09 1377000 123930
production
cost

EMV Calculation (AFTER Mitigation)

Risks Risk Pr Pi Prx Pi Cost EMV

Delay in R1 0.2 0.05 0.01
Financial
closure
Trial Run R2 0.25 0.15 0.0375
TSP does R3 0.3 0.5 0.15 272000000 40800000
not work
Superior R4 0.3 0.5 0.15 9800000 147000
tech in 2-3
 years
MDM R5 0.2 0.7 0.14 68600000 9604000
coming with
better tech
Breakout R6 0.3 0.2 0.06 15450000 927000
Reliability R7 0.2 0.4 0.08 735000 14700
Lukewarm R8 0.1 0.2 0.02 9800000 196000
by
construction
Non R9 0.3 0.4 0.12 9800000 1176000
acceptance
by
automobile
Scrap cost R10 0.25 0.4 0.1 18090000 1809000
Other R11 0.075 0.1 0.0075 11520000 86400
operating
cost
Other R12 0.08 0.9 0.072 1377000 99144
production
cost

Assumptions

Capacity – 1 million tpa

Max production – 900000 tpa --- Construction -800000 tpa and Auto – 100000 tpa

Production Build up

1st Year- 60% - 600000

2nd year- 75% -750000

3rd Year- 90%-900000

Annual costs -900000

Monthly costs- 75000

Daly costs- 3000

Hourly(20hrs) – 150

Costs

Variable cost

- Scrap 100.5
 - Marerials and supplies 56.0
- Energy 24.0
- Variable Labour 28
Total 208.5

Fixed Costs

- Labour 6.3
- Maintenance 9
Total 15.3

R3 RISK – 340 MILLION – 20% SALVAGE = 272 MILLION

R4 Risk- 100000 x 98(contribution)= 9800000
R5 RISK- 700000 X 98 = 68600000

R6 RISK- say 1breakout/week

½ day production cost
3000 x0.5 x 50 week = 75000 tonnes
Cost of material loss = (208.5 -100.5) x 75000
Profit loss = 75000 x 98 +208.5 -100.5) x 75000 = 15450000

R7 risk – Reliability
1 hr/week = 150 x50 = 7500 tonnes
7500 x98 = 735000
R8 risk = Lukewarm response by construction = 100000 x 98 = 9800000
R9 risk= Non acceptance by automotive = 100000 x 98 = 9800000

R10 risk = Scrap cost = 100.5 x 20% x 900000 = 18090000

R11 risk = Other operating cost = 128 x 10% x 900000= 11520000
R12 risk = Other production cost = 15.3 x 10%x 900000 = 1377000