Risk and management
Everyone is familiar with risk. We may not have a formal definition, but we
generally think of risk in terms of unpleasant things that might happen. There
is a risk that an investment will lose money, that a train will be delayed, that we
will have a motor accident or that someone will become ill. For managers, risk
is a threat that something might happen to disrupt normal activities or stop
things happening as planned. For instance, there is a risk that a new product
will not sell as well as expected, that a project will not be successful, that the
costs of raw materials will rise, that a delivery to customers will be delayed,
that a supplier will go bankrupt or that a warehouse will be destroyed by fire.
Risks occur because we can never know exactly what will happen in the
future. We can use the best forecasts and do every possible analysis, but there
is always uncertainty about future events. It is this uncertainty that brings
risks. Alberta Highways can do everything possible to build a new road on
schedule, but an unexpected snowstorm can cause delays; Mazda can carefully arrange a delivery of cars to Berlin, only to find their journey interrupted
by industrial action; Dell can schedule its production of computers, and find
that a typhoon in Taiwan hits the supply of chips.
The basic problem with discussing risks is that they come in so many
different forms. They can appear at any point in a supply chain from initial
suppliers through to final customers; they can interrupt the supply of materials or the demand for products; they can cause sudden peaks in demand or
collapses; they can range in scope from a minor delay through to a natural
disaster; their effects can range from short-term and lasting only a few
minutes through to permanent damage; their effects might be localized in
one part of a supply chain, or passed on to threaten the whole chain. And
different risks can be linked, in the way that an outbreak of some disease can
cause a spike in demand for surgical masks, vaccines and antiseptic wipes, but
a drop in the availability of people to produce them.
In reality, most risks are fairly minor and have limited consequences. For
instance, congestion on a motorway might make a delivery an hour late;
although this is unfortunate, in the big scheme of things it is rarely a catastrophe. On the other hand, risks occasionally have enormous consequences.
For instance, unexpected market conditions in 1997 left the clothing retailer
Next with the wrong things in stock – and when it could not meet customer
demand there was a dramatic drop in sales, followed by a fall in share price
(Braithwaite and Hall, 1999a, 1999b). In 2001 over-optimistic forecasts
encouraged the electronics manufacturer Cisco to build up stocks to meet
customer demand that never materialized. It eventually wrote off $2.2 billion
of excess stock. In 2006, the weaver Camillario lost 60 per cent of sales when its
main customer moved operations to China, and it almost immediately went
into liquidation. Toyota shut down 20 of its 40 assembly lines for six weeks
following a fire at a valve supplier, with an estimated cost of $40 million a day
(Nelson, Mayo and Moody, 1998).