BUSINESS RESEARCH

Understanding and Managing Risks

Risk management is often treated as a compliance issue and an exercise in rule-following. Maximising compliance is, of course, a sensible precaution but rule-based management neither reduces the likelihood of disasters nor their impact. Executives need to understand the distinctions between different risk categories and tailor risk management strategies accordingly.

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June 2012

Risks fall into one of three categories:

1. Preventable risks: internal risks that are controllable and should be avoided – for example,managers’ unauthorised or illegal actions and risks arising from operational process breakdowns.Best managed by: active prevention to help monitor operational processes and guide employees’ behaviours and decisions toward desired norms. It requires a well-crafted mission and value statements, strong internal control systems (separation of duties and whistleblowing processes), and a capable internal audit department to deter bad behaviours and detect violations.

2. Strategy risks: companies must accept some voluntary risks in order to generate superior returns – for example, in R&D activities or new market penetration. Best managed by: open and explicit discussions. Such a system does not prevent risks, but enables companies to undertake risky ventures – with potentially high rewards – that competitors with less effective risk management systems could not.

3. External risks: some outside events are beyond a company’s control, such as natural and political disasters and macroeconomic shifts. Best managed by: focusing on identifying and mitigating their impact.

Action point: Consider how effectively your company handles risks across the three categories:

Referenced techniques

Technique

Risk Management in Purchasing and Supply Management

Purchasing departments use various strategies and techniques to minimise the impact of detrimental events occurring in the supply chain. This concept has been created to assist managers with risk management. It presents main attributes and some examples of risk management through proactive purchasing activities.

Technique

Supply Chain Risk Management

The concept reviews the literature, presents some examples and determines the main advantages, capabilities and success factors of the SCRM. It aims to provide an understanding of the business requirements needed for supply chain risk management from a practitioner perspective.

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