What Is Risk Mitigation?
At its simplest, risk mitigation lowers exposure to risk, or moderates the adverse effects. A slightly more complete risk mitigation definition is “developing preventative and reactive action plans for reducing the likelihood of risk, or damage from risk.” Within the procurement and supply chain environment, the risk mitigation process includes using appropriate measures to secure supply.
Risk mitigation can also be thought of as risk control. For example, regular maintenance of a machine can help you control the risk of breakdowns. This preventative effort to mitigate or control risk costs money or resources. However, the cost of reacting to risk can end up being much higher.
Why Risk Mitigation Is Important
Ignoring risk factors is not an effective strategy, nor does it make risk go away. It is also inefficient to estimate the impact of risk without taking further action. This is why risk mitigation is important. By having a defined plan with rational and structured actions, you can avoid certain risk events altogether, or reduce the severity of their aftermath.
Risk mitigation is just one part of a good supply chain risk management strategy, in which you monitor, identify, assess, and mitigate risk:
- Monitor. Here you observe risk occurrences in your supply network, transport hubs, and your own facilities. Not only does this help you react faster should risk events strike, but it helps you recognize patterns. This allows you to develop proactive mitigation strategies, so you act in advance of events.
- Identify. You uncover potential risks in your supply chains. Among others, these include financial, cyber, compliance, man-made, natural hazard, and geopolitical risk. Identifying supply chain risk ideally includes any risk that arises from sub-tier suppliers, third parties, or any points along the supply path.
- Assess. In your risk assessment, you evaluate how likely it is that the event will strike. You also estimate the risk impact, in other words, how it will affect supply or how much damage it could cause to your operations. Here, a risk assessment framework can help you outline which risks are high and which are low.
- Mitigate. For supply chains, risk mitigation measures often depend on the probability and impact of the risk event within your supply network. You develop plans based on how severe the consequences would be to the procurement, production, and delivery of goods.
An effective supply chain risk management cycle addresses all types of risk, across all tiers and supply paths.
What Are Risk Mitigation Strategies?
By understanding the likelihood and impact of threats in advance, risk mitigation helps you understand the total risk you are willing to assume. When mitigating risk, various techniques are commonly used in parallel.
- Prioritize risk. Evaluate the areas that your business relies on. These are the first risks you have to control. Risk prioritization of certain categories or processes, however, is just the first step. Only a holistic approach will allow you to truly mitigate risk in your organization.
- Accept risk. Most people are familiar with Murphy’s law: When something can go wrong, it will, and at the worst possible time. Risk mitigation involves a certain degree of risk acceptance, in which you also accept the probability of a threat, along with its consequences.
- Avoid risk. Risk mitigation can include risk avoidance. This is when organizations steer clear of certain types of risk through proactive measures. In supply chain planning, this might be keeping buffer stock to avoid outages, for example.
- Reduce risk. Similarly, risk reduction serves to lower or minimize specific risks and their impact. Insolvency of a key supplier would most likely severely disrupt operations, so you want to minimize supplier financial risk. Supplier evaluation and ongoing real-time monitoring help reduce that threat.
- Transfer risk. This is when another party agrees to accept the consequences of risk. A common example of transferred risk is insurance. You pay a certain amount, they replace the costs of specified risk events. Here, too, mitigation involves the balance of cost and risk. The more you cover, the higher your premium.
What’s in a Risk Mitigation Plan?
Here is an example of a day-to-day risk mitigation plan. Let’s say you want to leave the house. You begin by monitoring the weather. You look outside and see that it is cloudy, so you accept the risk of rain. You can’t influence the weather, but at least you have identified the risk. You assess how high this risk is by checking the weather report, and see that there is a 70% chance of rain. So you decide to take an umbrella with you. In this way, your umbrella mitigates the consequences – getting wet – once you have monitored, identified and assessed the risk.
So, in a risk mitigation plan, you outline the risks, anticipate the consequences, and plan options to moderate the effects. In much the same way, you can support your supply chain risk mitigation efforts with a risk scorecard for each risk object in your supply network. This allows you to:
- Collect your key evaluation criteria in one place
- Rate business partners, facility locations, or transportation hubs based on indicators within different categories of risk, such as natural hazards or compliance risk
- Assign weights to the categories
- See at a glance where the greatest threats exist
Couple your risk scorecards with your supply chain knowledge. Then you are well on your way to a risk mitigation solution as part of holistic supply chain risk management.
And one more thing. When mitigating risk, it is a good idea to seek out expert advice. Experts can tell you what’s worked in the past, what’s easy, and what’s hard. Risk assessment professionals have the knowledge and experience essential to their area of expertise.
In other words, that weather report was put together by meteorologists using complex equipment including weather radar, air-, land, and sea stations. The data can pinpoint conditions at any of these locations, and is aggregated by powerful computer programs.
How to Mitigate Risk with Sphera Supply Chain Risk Management [formerly riskmethods]
When it comes to supply chain risk management, we know just where you can find the experts, and the technology, to help you pinpoint various types of risk, such as financial, cyber, compliance, and extreme weather events, at locations that are critical to you.
Supply chain risk management is much more than mitigating risk in your supply network. The best risk mitigation is embedded within the comprehensive supply chain risk management provided by Sphera Supply Chain Risk Management [formerly riskmethods].
By using artificial intelligence, Sphera Supply Chain Risk Management [formerly riskmethods] helps organizations monitor, identify, assess, and mitigate risk. Benefits include competitive advantage from cost avoidance, business continuity, compliance, and stakeholder trust, whether employees, business partners or investors.
Good risk management relies on delivering the right information to the right people at the right time. Enterprises establish a risk-management culture, from the executive level through procurement and supply chain roles, and communicate these aims. The risk-aware organization factors in the cost of risk in every decision. You’ll be prepared for risk, come rain or shine.
riskmethods was acquired by Sphera in October 2022. This content originally appeared on the riskmethods website and was slightly modified for sphera.com.
