Do risks seem like external challenges to which you must react? Is strategy too high-level a concept to effectively address real-world risk? While most supply chain and operations management professionals know the right answers to these questions, too often we don't put those answers in action.
In the August 9 APICS Operations Management Now, “The Building Blocks of Risk Management,” APICS CEO Abe Eshkenazi, CSCP, CPA, CAE, wrote about how LEGO has learned to treat risk management as a critical aspect of its strategic efforts. Whereas the business traditionally had managed only the “usual suspects”__a fire, a legal matter, a network system crash__today, executives have become dedicated to truly comprehensive strategic risk management.
Every business activity involves risk; there is no other way to achieve reward. Successfully walking that tightrope often is determined by asking
- do the risks we take deliver the rewards we want?
- are we fully aware of the risks we endure?
- can we achieve competitive advantage by rebalancing our risk and reward?
This is a fairly new domain for supply chain management, so many companies are allocating assets to address the challenge. LEGO, for example, created a new position: senior director of strategic risk management (SRM). The business also identified four key elements to its risk management strategy, which include integrating risk management in all aspects of the business, using Monte Carlo simulations to develop best- and worst-case outcomes, establishing a standard method of decision making, and creating a portfolio of possible scenarios. Interestingly, this approach revealed that LEGO was, in some cases, taking too few risks.
SRM maturity offers powerful results if it is built into production, demand planning, budgeting, and partner relationships. We begin to see a more stable business environment__one in which, if even the worst-case scenario occurs, we know how to act rather than react. We come to view the risks that our organization is well-suited to handle as strategic competitive advantages. We start to remove uncertainty and, in its place, build stronger organization-wide performance, such as with sales and operations planning.
Mark Frigo, director of the Center for Strategies, Execution, and Valuation at DePaul University, recently said: “If [enterprise risk management] (ERM) encompasses all areas of organizational exposure to risk, including strategic, why is SRM the new core competency? We believe SRM is a foundation for elevating the value of ERM and, for that matter, management in general.”
In 2011, APICS began developing extensive research in the areas of risk management and strategy designed for the supply chain and operations management practitioner. Ongoing research reveals that successful strategy means minimizing risk while delivering the right products and services to the right people at the right time, as called for by the business strategy. Furthermore, where business strategy and practitioner strategy remain independent, risk grows; effective companies thus integrate strategy and tactics, closing the gaps between senior management and supply chain and operations management professionals.
Jonathan Thatcher, CSCP, is director of research for APICS The Association for Operations Management and author of the APICS magazine “Ask APICS” department. He may be contacted at firstname.lastname@example.org.
APICS offers a variety of risk management and strategy research reports to help you build your organization’s strategic risk management maturity. Visit apics.org/research to access APICS executive and research reports and APICS folios. These documents contain valuable insights from supply chain and operations management professionals around the world.