Demystifying Risk Management: What You Need To Know

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April 29, 2015

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Photo credit: 12congwi / WordPress

Photo credit: 12congwi / WordPress

“Risk management” is one of those business terms that are thrown around often but can generally have a very vague and difficult to put down explanation. A commonly accepted definition is self explanatory from the very term, even in the context of logistics. A supply chain manager identifies, sizes up and prioritizes risks, then takes steps to minimize and control the occurrence of these risks, as well as the potential impact on the company should they come to pass. This generally means directing the necessary resources (which can range from financial resources to personnel) in the most efficient manner possible towards preventing or tempering the risks identified.

It is apparent that this is an incredibly important part of running any successful business, whether within or outside the supply chain management industry. Smaller companies may not see the value of this particular aspect of business management, given that risks are likely to be small scale and potential damage is generally manageable. As companies grow, though, this should start to become a serious consideration with steps made to integrate risk management in strategic planning initiatives. Risk management for the company can be done internally, with the help of specific staff trained in the necessary disciplines, or by external consultants who periodically provide analysis and advice on the way forward.

One key facet of risk management is enterprise-wide risk management. This refers to the overall framework used to carry out risk mitigation across the company. Having an effective framework forms the foundation for all decisions to be made with a risk-conscious perspective across all the functions of the company. Risk management also includes conflict resolution. It should be obvious that disputes, whether internal or with a third party outside the country, can escalate to the point of threatening the company’s well-being. This may most commonly come in the form of lawsuits filed that could damage the reputation of the company, affecting future potential business, or directly result in risk to the financial status of the company where payments are ordered by the court.

Photo credit: Wakalani/ Wikimedia Commons

Photo credit: Wakalani/ Wikimedia Commons

This ties in with the third, crucial facet of risk management, which covers the measures taken to safeguard against the realization of financial or commodity risks. Here, the internal risk manager or external consultant strategically identify any threats to the financial continuity of the organization, and commodities associated with it, in a bid to ensure minimal damage to the company should the threat come to fruition. A fourth aspect of risk management involves ensuring the company’s continued compliance with legal and regulatory obligations. This includes the obvious, such as correct licensing to operate as a legal business, adherence to labor laws that may open the company up to litigation as well as being at peace with independent bodies that govern the industry of operation, e.g the Insurance Regulatory Authority for insurers.

Risk management also includes identifying and reporting corporate fraud. The earlier such incidences are pin pointed, the easier it is to manage the fall out in terms of financial losses, employee termination, negative media coverage and so forth. At the same time, risk management provides the service of “auditing” management structures or protocols and other internal systems to make sure they are running at optimum capacity and expose the company to as little risk as possible.

Essentially, in spite of the technical-sounding name, risk management is comprised of the same pedestrian measures taken to ensure the success of a business by protecting it from any dangers one can realistically imagine. In fact, it can be argued that each supply chain manager, whether intending to or not, practices some measure of risk management in the course of their duties. Imagine, then, how much better it would be were we to implement the facets of risk management intentionally and with gusto? Do have a risk-free week, won’t you?


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