Friday, June 25, 2010

Portfolio optimization, risk management, and operations

As we see every day -- whether in business or in our personal and professional lives -- decision-making and its consequences, are fraught with risk. The risks may take on many forms from political risk to exchange rate risk and price volatility risk to environmental risk and disruption-based risk, as in disasters due to natural causes, accidents, or planned attacks, to name just a few. The world now is reeling from the BP Deep Horizon oil rig blowout, the most graphic, high impact recent environmental and economic disaster.

Risk management, hence, has evolved as a topic in its own right and is necessarily interdisciplinary because of its vital components, be they social, engineering-based, financial, natural, operational, etc.

In terms of business operations, firms may need to decide whether to outsource various economic activities associated with their supply chains or to continue business as usual. They may need to assess whether to merge or to acquire another firm, which may lie thousands of miles away. They may have to identify new partnerships or to shed older ones; to promote and hire new executives, or let others go. Should one build a new manufacturing plant and where? Should one bring to production a new product? Should one expand into new global markets? All such decisions must have embedded within them some measure of risk since we live in uncertain and very dynamic times.

The areas of finance and operations management (propitiously also the name of my department at the Isenberg School of Management at UMass Amherst) can bring much to both research in and the practice of risk management.

Last year I had the honor and pleasure of instructing a course on portfolio optimization in the Executive Education program at Harvard University's Graduate School of Design. The course covered the fundamentals of portfolio optimization and risk management and also discussed the importance of a network and systems perspective to financial management.

My course lecture notes can be accessed here

Today we are conducting research on global outsourcing and risk management as well as on supply chain network design and risk. Our recent studies on various supply chain network as well as financial network topics can be accessed here.

Without appropriate risk management and risk mitigation strategies our already fragile and vulnerable networks may not be sustainable.