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The Building Blocks of Risk Management

by APICS CEO Abe Eshkenazi CSCP, CPA, CAE |   2013 | 0 | 0

Many of you probably can remember stacking and snapping together LEGOs from when you were a kid. Maybe, as a parent, you also have some not-so-fond memories of stepping on those little, hard plastic blocks. However, when you were nursing your sore foot, I bet you never imagined LEGO, the company, could teach you a lesson in risk management? Monday’s Wall Street Journal featured an article on how the company, and its senior director of strategic risk management Hans Laessoe, made risk management an essential part of LEGO’s strategic endeavors.

In 2006, Denmark-based LEGO was still basking in its streamlined operations, which turned around the almost-bankrupt company and pushed it into a successful enterprise. Still, Laessoe said in an interview he had to Google “risk management” when he first started his quest. At that point, company leaders only were managing traditional risks such as fire safety and legal problems like copyright infringement.
“The company faced a minefield of bigger risks that threatened its reemergence as a dominant force in the toy business,” Jans Hansegard writes. “Laessoe came to understand that LEGO had to start taking strategic risks in the market seriously; especially as it caters to some very fickle customers: kids.” He implemented a risk management strategy that encompassed four building blocks:

  • First, he spread risk management throughout the organization, including with project managers and division leaders.
  • Next, Laessoe introduced Monte Carlo simulations. The APICS Dictionary, 13th edition, defines those as “subset[s] of digital simulation models based on random or stochastic processes.”
  • The third building block incorporates active risk and opportunity planning, which enables decision makers to examine the benefits as well as the drawbacks of risk.
  • The last building block entails a variety of scenarios to help workers imagine what could happen. Laessoe “looks at companies that once dominated their industries, such as Nokia or Kodak, which missed the boat on smartphones and digital photography, respectively.” He doesn’t want LEGO to miss its boat.

Risk and reward

LEGO’s third risk management building block focuses on an idea APICS has highlighted extensively in the APICS Supply Chain Risk and Reward Folio: Measuring Risk in Your Supply Chain. It opens with the following: “Risk is a cost. Reward is the actual or anticipated benefit. Not every reward is worth the cost. This is true everywhere, including supply chains. The goal is to reduce or eliminate risks that fail to offer adequate rewards through risk-reward analysis. Think of risk-reward analysis as similar to cost-benefit analysis. In cause and effect terms, enduring a risk creates the opportunity for a reward, but it must be a reward worth having.” APICS Folios are available free to APICS members ($19.95 for nonmembers) at apics.org.

In addition to risk management information throughout APICS education and certification content, we offer the APICS Risk Management certificate. With the certificate, supply chain and operations management professionals can prepare to lead risk management activities or participate in the development of global risk mitigation strategy. Obtain the hours necessary to earn the certificate by attending the risk management learning path at APICS 2013 (five hours) and participating in a combination of APICS programs to complete the remaining seven hours. For more information about APICS and risk management, visit apics.org.

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