Overview of risk management appetite

Let’s look at what each quadrant shows:

• Low risk/low reward: CONSIDER

The risks are low in terms of impact and likelihood. The rewards are also low. For example, finding a new supplier of a routine purchase like stationery to make a small saving. Are you using a resource that could be used more productively elsewhere?

• High risk/low reward: AVOID

These risks are considered highly likely to happen, with a significant impact. But the rewards are low. For example, a lower-quality product may save money for your organisation but risks damaging relationships with your customers. In practice, reducing the specification for PPE may end up saving minimal amounts of money but it risks generating quality problems which could end up incurring costs for sorting and rework in other areas. In addition it might cause other liability issues.

• Low risk/high reward: PROGRESS

These are clearly risks that are worth taking. For example, using a cheaper substitute product which is already widely used and accepted in the market place to reduce your costs. This could mean sourcing pharmaceutical products from other non branded suppliers in Europe. Providing you have reliable certification these sources could save considerable amounts of tax payers money. Supplier appraisal and assessment can help keep the risk low in this category.

• High risk/high reward: CONSIDER

These are risks which are highly likely to take place, causing disruption. However, the rewards are also likely to be high. You should consider what steps you can take to manage the risk, including holding additional stock to cover if supplies are interrupted, or working in partnership with another firm to help each other out.

When considering high volume, high value products such as drugs and vaccines locating new alternative sources of products from China might be beneficial and has the potential to save significant amounts of money. However, this could be very risky due to the current political sensitivity of issues between governments. China also has a poor reputation in the use and protection of IPR (Intellectual Property Rights) when producing substitute products. These sorts of concerns need to be considered thoroughly before placing contracts. These risks are high level and often difficult to foresee and manage.

Negative risks are likely to cost you money to put right. Once a risk has happened, it should be classified as an event or an issue. The cost of an event is referred to as a direct loss or indirect loss.

• Direct losses arise directly from an event. For example, damage to property or assets, or stock lost in a fire. Losses like this can be quantified and may be recovered through insurance.
• Indirect losses are a consequence of the event, such as an interruption to ‘business as usual’, reputational damage and potential lost sales. It is more difficult to quantify these losses, so recovery through insurance is not always possible.

Having to deal with risks that actually happen will cost money to put right and in the private sector this will have to be taken from your profits. In the public sector this means that tax revenue will be wasted and the ability to deliver vital public services to the community will be restricted.

To summarise, there are clear benefits of procurement and supply chain risk management. These include:

• It helps to identify possible disruptions in supply chains and to take steps to mitigate the impact.
• You will be able to keep your own stakeholders informed so they are ready for any delays. This will protect or even improve your relationship with them.
• There will be an improvement in overall supply chain performance as a result of your deeper understanding of how your supply chain works and the risks it might encounter.
• To be seen to be proactively managing risks will improve your reputation in the market place. Your own employees will also see some long term benefits in terms of continued employment with good pay and conditions.