In the post 6 Ways to Build a Resilient Supply Chain, I briefly introduced a method for assessing risk from a severity and probability perspective. I provided some specific examples of how we reduce supply chain risk but there is a theoretical model in risk management that can help us structure our method of attack on risks that have been identified.
There are four risk treatments (or courses of action/non-action) when faced with risk:
Avoidance: This strategy eliminates the risk by avoiding the course of action that includes this risk. For example, a company can avoid foreign exchange risk by only doing business domestically and avoiding the international market.
Reduction: Actions can be taken to reduce and in some cases with enough effort and investment eliminate a risk. For example, workers can wear personal protective equipment (PPE) to reduce the occurrence and/or severity of a safety incident in a hazardous environment.
Sharing or Transference: Risk can be shared among multiple parties. Contracts can have stipulations for unforeseen events that pass damages to one or multiple parties. Insurance is also a method of risk sharing among multiple parties.
Acceptance: If damages from an event are tolerable, a business can choose not to do anything and accept the risk. In this case, the business retains the risk and is said to be self-insured.
In the past, risk management has often been put behind other initiatives. However, supply chains have recently been shown to be less robust than they should be. Armed with methods for assessing and addressing risk, you can now develop a risk management plan for your business.