APICS Operations Management Body of Knowledge Framework, Third Edition

3.3 Risk management

This section covers the management of risks surrounding unanticipated events that disrupt the normal flow of goods and materials within the supply chain. These uncertainties can be categorized across two dimensions: coordination risks, or those associated with the day-to-day management of the supply chain, which are normally addressed using principles such as safety stock, safety lead time, and overtime; and disruption risks, which are caused by natural or man-made disasters such as earthquakes, hurricanes, and terrorism.

Primary focus in this section is given to the concepts and tools that manage disruption risks. Events related to disruption risks contain a great deal of randomness and are virtually impossible to predict with any precision.

3.3.1 Risk management framework

Disruptive supply chain risks lend themselves to a three-step risk management process, which consists of the following steps.

Identify the sources of potential disruptions. The first step is to assess the types of vulnerability in a supply chain. The focus should be on highly unlikely events that would cause a significant disruption to normal operations, including natural disasters, capacity failures, infrastructure failures, terrorist attacks, supplier failures, labor actions, equipment failures, price volatility, and military and civil conflicts.

Assess the potential impact of the risk. Next, quantify the probability and the potential impact of the risk. The assessment depends on the specific incident, but it can be based on factors such as finance, environment, business viability, brand image and reputation, and human lives.

Develop plans to mitigate the risk. Finally, create a detailed strategy for minimizing the impact of the risk. These strategies can take different forms depending on the nature of the problem.

The following table contains some examples of risk mitigation strategies.

Risk

Risk mitigation strategy

Transportation failure

Use of redundant vehicles, modes, and operators

Supplier failure

Sourcing from multiple suppliers

Climate change, inclement weather

Contingency planning, including alternate sites; insurance

Licensing and regulation issues

Up-front and continuing research; legal advice; compliance

Major quality failure

Careful supplier selection and supplier monitoring

Loss of customers

Innovation of products and services

Theft/vandalism

Insurance; security precautions; knowledge of likely risks; patent protection

3.3.2 Risk mapping

Risk mapping involves assessing the probability or relative frequency of an event against the aggregate severity of the loss. Some risks might be deemed acceptable and part of the normal costs of doing business. In some cases, firms may find it possible to insure against the loss. In other cases, the potential loss is great enough that the risk needs to be avoided altogether.