Risk assessment is exactly what it says it is: Assessing risks. Of course by default, every business owner knows that risks are just a fact of life that need to be managed.
The real question being asked here is how does one avert risks in various areas of their business? When it comes to your supply chain, it is arguably among those that require the most complex solutions because of the disparate nature of the functions involved in supply chain.
To keep you well informed, here are the top three primary goals of any risk assessment process and how accomplishing them protects your business from the disastrous outcomes of disruption.
1. It identifies the most vulnerable areas in your network and applies a root cause.
On the foundation level, the definition of a risk is essentially anything that will create delays, shortages and ultimately, disruption in your supply chain network. These risks come in all forms, from external risks like poor manufacturing conditions to internal ones like sudden shifts in upper management. With this definition, the process of risk assessment will determine which of these will likely affect your supply chain, in what way (the root cause) and to what extent.
It is important for an evaluation like this to be independent, objective and, whilst allocating ownership, avoiding a blame mentality. After all, an unassessed and mitigated risk will impact everyone so we all gain from having a ‘risk radar working well and effectively across the organisation. Sources of risk, can be many and varied. Having a risk profile created for various parts of your network will allow you to make wise and cost-effective decisions on how to manage that risk.
2. It tests and formulates strategies that are meant to adapt with information.
Today, it is not merely the flow of products and/or services, as well as financial flow that should be the primary goal of risk assessment. Ensuring an effective flow of information also needs to be a priority. Thought leaders are not exaggerating when the say the world is moving faster thanks to IT! Successful risk assessment is about using these information tools to quickly create strategies that defy disruption.
For example, if you received reports of an incoming storm that could delay shipments, then you need to know how to make any changes necessary to keep everything going as scheduled. Good assessment helps create the sort of flexible strategies and contingency plans, while tools and technologies (even artificial intelligence) allow us to interpret and use the information as it comes through in the most relevant and appropriate manner.
3. It allows us to determine the readiness of the organisation to deal with disruption by assessing the relative impact of the risk relative to all stakeholders, and thus prioritising the mitigation strategies.
Lastly, risk assessment is also about measuring the stakes of all the parties involved in your supply chain. That includes not just your business but also your customers and your partners. It includes reports on the impact of the potential risk on each stakeholder and creates a clear map of how each risk plays out for them.
Understanding the relationship between all parts of the network can also make it easier to establish what key performance indicators everyone can agree on under normal performance situations and then, within a disrupted environment.
For instance, if a salsa brand discovered that a certain level of quality is enough to produce massive sales for their products, then information about that quality level (and how to achieve it) should be shared across the network in standard recipes. In short, it’s a risk to not share it properly across the network.
But what happens if the quality of the salsa suddenly cannot be matched? What’s our Plan B for that location to recover and what will we be measuring under this circumstance? (Market share lost as a result of salsa quality? How quickly could we recover and produce the best quality? How quickly we could source from an alternative location? How quickly can we find an alternative supplier for that missing ingredient?)
And once we have worked out the root cause, what are we going to do to ensure this issue never happens again? Sure, natural disasters including weather conditions are hard to avoid, as are external threats. On the other hand, we can always take a hard look at our relative exposure to these types of risks and consider a rearrangement of our supply chain network as well as identification of clear back-up locations not likely to experience the same weather events.
All in all, it is easy to understand the basic definition of risk assessment. However, it can be another story when you actually apply it to something as complex as a supply chain.
With all the different types of risks and countless other what-if scenarios that could affect your network, it is easy to ‘get lost’ in the process. Just keep these simple primary goals in mind, and then no matter what risk you are assessing, you will quickly be able to work out
- The root cause of the risk.
- The stakeholder map of who’s affected and by how much.
- The priority for this risk and the most effective way of mitigating it.
- The relative readiness to deal with this risk should it actually happen to you!
In other blogs, we talk about determining the likelihood of these disruptive events actually occurring and at what point you really need to be mitigating this risk.
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And of course, if you would like more information or to discuss more ways how to drive greater innovation into your supply chains, you may book for a Complimentary Consultation with me.
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