The risks auto dealerships face are wide, varied and complex. When it comes to managing these risks, you can’t wait for something to happen before you develop a response. Enterprise risk management (ERM) is an integrated approach to understanding and managing an organization’s risks. Through ERM you can establish a plan that reduces risk and responds to incidents as they arise.
This Risk Insights is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel or an insurance professional for appropriate advice.
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There is not one specific way to apply ERM to a business. It exists more as an overriding concept that allows for multiple approaches to the same end. For auto dealerships the approach to ERM can be broken down into five main steps.
Identifying Risks in Auto Dealerships
Begin by developing a list identifying all the risks facing your business. List both internal and external factors, accounting for the financial as well as other risks:
- Competition: If a competitor revises their sales system or pricing structures it could force you to lower prices in order to stay competitive. Likewise, new competitors can enter the marketplace, which could take potential business away from you, causing a decrease in revenue from ether loss of sales or price reductions required to maintain a competitive advantage.
- Inventory: If a customer is looking to buy and you don’t have the make or model that they want, you could lose their business. Conversely, retaining too large of an inventory can exposure your dealership to additional losses in the event of a storm, theft or other disaster.
- Manufacturer Problems: If you deal primarily in only one or two brands of vehicles, your success is directly linked to the manufacturer. Their brand reputation, vehicle offerings and general financial wellbeing is all out of your control but could directly affect your business operations.
- Regulatory Demands: Whether it will change the way you handle your business operations or deals directly with the features of the vehicles you sell, legislative changes are unavoidable and must be dealt with when they arise.
With auto dealerships, taking a proactive approach to risk management with ERM will help you prevent, or greatly reduce, the risks faced during your daily business operations.
The key to assessing risk lies in two factors, the probability of the risking occurring and the potential outcome for your business. Addressing these factors will help you be able to rank your risks, establishing which are the most pressing. When it comes time to implement solutions you will have a guide for which risks need to be addressed first.
When you begin assessing risk it may be more manageable to go department by department. However, it is important that you also consider how risks affect your organization as a whole. Often times when a risk affects one department it will also affect another. When you discover one risk ask yourself how it affects other aspects of your business.
After you have compiled the risks facing your business, you will need to determine an appropriate response. Ask yourself the following questions about each one of your risks:
- Can it be avoided? Sometimes risk is an unavoidable part of doing business, sometimes it’s not. If there is a way to completely eliminate the risk, do it.
- Can it be reduced? If you can’t eliminate a risk completely you may be able to reduce the likelihood that it will affect your business. Evaluate which control methods you can put in place to cut down on the severity of risk.
- Can it be offset? While some risks can’t be avoided or reduced, you may be able to share the risk. Insuring against unavoidable risks protects you from feeling the full force of a potential loss.
- Can we do nothing? Some risks are simply not worth worrying about. They either have a low probability of ever materializing or the cost to prevent, reduce or insure against them is more than the projected loss.
For risks that can be reduced, establish set control methods through workplace polices. These don’t always have to be expensive solutions. Protecting private customer data by password protecting your computer system, or preventing vehicle theft and misuse by keeping keys in a locked area and requiring salespeople to ride along on test drives, are simple ways to reduce the chance for loss and cost you very little.
With all control methods it is important to ensure continued effectiveness. Once methods have been established, you will need to assess whether the control methods are being followed by employees and if they are effectively reducing your risk.
It’s All for Preparation
The goal of ERM is to make sure you aren’t caught off guard by any unforeseen risks. By evaluating potential risks ahead of time you can establish a guide for how risk-related decisions will be made before they have to be. This preplanning with help keep your business on track no matter what situation arises.