Operational Risks and Organizational Performance of Sugar Manufacturing Companies

Abstract

While taking deliberate and informed risks is a significant component of a strategy of any company, amplified operational risks has led to extremely high-risk exposures to business firms. Insomuch as risk management is thought to be an important control and tool of management, there is limited data from the previous empirical research that link operational risks to the poor performance of sugar production companies in Kenya. The general rational of the research was to find out the effects of operational risks on financial performance of sugar production companies, a case of South Nyanza Sugar Company (SONY). The specific objectives of the research were to ascertain the operational risks faced by SONY sugar firm, determine connection between operational risks and organization performance of SONY and determine the mitigation measures for the operational risks in SONY. The theoretical models that guided the study include the Extreme Value Theory (EVT), and top-down versus bottom-up models. This study used descriptive case-study design and the study population was the entire SONY employees. The target population of the study, therefore, consists of 33 employees in risk management department, who were all involved in the study through judgmental sampling technique. The study used both primary and secondary data sources, where primary data was gathered by administration of questionnaires. Descriptive statistics (mean, frequencies, standard deviation and percentages) as well as Pearson correlation test were used to analyse quantitative data. From the results, rendement (yield) as an operational performance had a moderate positive relationship with financial performance (profitability) of SONY sugar firm. The study also found that operational risks had a moderate but negative relationship with financial performance (profitability) of SONY sugar firm and also had moderate but negative relationship with rendement rate of the firm (yield or efficiency). Operational risk mitigation measures were also found to be strongly and positively correlated with the profitability of the firm, as well as with rendement. However, it had moderate but negative relationship with the operational risks. According to the findings of the study, sugar processing companies are exposed to a variety of operational risks. Therefore, they should develop practical risk management programmes that can be implemented to reduce the level of risks in sugar cane processing into sugar. Sugar mills will be revitalized by performing repairs and replacements of equipment whose performance has declined, and by supervising the implementation of Standard Operation Procedures (SOPs) at the mills in order to reduce the level of sugar loss during processing. The entire sugar mill management team must be committed to improving the performance of the sugar mills. In addition, an overall mill audit, beginning with the steam generating station all through to the grinding station and processing station, is required in order to identify the sources of sugar loss and sugar mill inefficiency and to make recommendations for improvement.