Appetite for Taking Risk in Your Supply Chain

 
 
 

How far will you go?

How much risk can your organization tolerate?

Today’s supply chains are full of risks due to increasing complexity, ambiguity, volatility, and uncertainty. Supply management leaders have a multitude of decisions to make regarding supplier selection, lengths of supply chains, supply network design, and supply management strategies. These decisions have a significant impact on an organization’s Total Cost of Ownership and Total Cost to Serve.

Buyers in North America have long opted for low-cost sources of products, primarily from Asia. Such decisions while reducing immediate cost, lengthen their supply lines. Longer supply lines mean increased complexity and probability of failure due to an increase in potential points of failure. Supply disruptions can have staggering financial impacts on buying organizations.

The big question here is:

What is the appetite of your organization for accepting risk?

Defining risk, risk appetite, and risk tolerance are essential in developing an efficient supply risk management strategy. The following are robust definitions of both Risk Appetite and Risk Tolerance. Be sure to internalize them and reflect on them when making your supply management decisions.

NLPA’s Definition of Risk Appetite:

The total level of exposure to risk an organization wishes to undertake considering Risk vs Return trade-offs for one or more of its desired outcomes (think about short vs long supply lines)

NLPA’s Definition of Risk Tolerance:

The degree of uncertainty an organization is prepared to accept for a specific initiative or product, or a particular risk category

risk tolerance

Source: RIMS Executive Report

Other definitions of Risk Appetite and Risk Tolerance:

  • Source: ISO Guide 73:2009 Risk management vocabulary

Definition of Risk Appetite:

Amount and type of risk that an organization is willing to pursue or retain.

Definition of Risk Tolerance:

An Organization’s or stakeholder’s readiness to bear the risk after risk treatment to achieve its objectives.

  • Source: PMG Understanding and articulating risk appetite, 2009

Definition of Risk Appetite:

The amount of risk, on a broad level, that an organization is willing to take on in pursuit of value.

Definition of Risk Tolerance:

Risk thresholds, or risk tolerances, are the typical measures of risk used to monitor exposure compared with the stated risk appetite.

  • Source: ECIIA and FERMA, Guidance on the 8th EU Company Law Directive, article 42, 2011

Definition of Risk Appetite:

The level of risk that a company is willing to take:

High return-high risk; low risk-low return, or a portfolio of different exposures.

Risk appetite is strategic and relates primarily to the business model.

Definition of Risk Tolerance:

The maximum amount of risk that the company can bear despite controls.

Risk tolerance is more operational and relates primarily to the company’s targets.

  • Source: BS 31100:2008

Definition of Risk Appetite:

The amount and type of risk that an organization is prepared to seek, accept, or tolerate.

Definition of Risk Tolerance:

The organization’s readiness to bear the risk after risk treatments to achieve its objectives.

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Copyright 2020. This article is the property of the Next Level Purchasing Association and may not be copied or republished in any form without the express written consent of the Next Level Purchasing Association. Click here to request republishing permission.

By David Millington, SPSM, SPSM2, SPSM3 - Director of Education (Next Level Purchasing Association)

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