The final of the three concepts to consider is Risk Management.
Risk Management is an often-misunderstood technique. People see it as negative, looking for problems … when in fact that is only half the story.
Let’s start at the simplest level … what is a risk?
In Risk Management terms, a Risk is a ‘deviation from the expected’ … or in other words, something happening other than what you predicted. Note the language here isn’t negative … things could be worse than expected, but they could also be better than expected and still fall into our definition of ‘risk’.
That’s a very important point to note. Risk Management includes opportunities too. So, when we talk about Risk Management, what we’re actually looking for is risks and opportunities equally.
Risk Management as a technique is where we start to look at what could have a different outcome to what we expect, and how we could try to influence either the likelihood or the impact of that event taking place.
Think of a very simple example. Imagine your business sells cupcakes. You plan to sell 50 cupcakes a day. Now think of these two potential deviations:
So, how could you handle these in a more formal Risk Management way?
There are several things to consider for each potential deviation:
We can now start breaking down our two deviations. Let’s consider the first deviation:
Let’s consider our second deviation:
I chose these two deviations deliberately as they’re both deviations on the same area, demand vs supply. When you perform a risk analysis, don’t forget to consider what could happen on both ends of the spectrum for each area.
It’s worth noting that in a real-world example, you would try not to use ‘high/medium/low’ for assessing likelihood, impact and cost, but would use actual percentages and costs. The advantage of this is you can properly assess whether the expenditure of an action is justified by a corresponding reduction in other costs. An action that costs £1,000 but saves ten times that amount within a year is clearly worth it. An action that costs £1,000 but saves £100 a year is more of a debate depending on the industry. If an identified action does not change the impact or likelihood in a measurable way, question if it’s the best action to take … there may be better ones
We can use a Risk Management table to summarise these actions:
|Deviation||Impact||Likelihood||Action||Cost||Adjusted Impact||Adjusted Likelihood|
|Wasted stock at end of day||Medium||Low||Increase marketing||Medium||Medium||Low|
|Wasted stock at end of day||Medium||Low||Reduce production||Zero||Medium||Low|
|Run out of stock before end of day||Medium/High||Low/ Medium||Discount offer||Low/ Medium||Low||Low|
|Run out of stock before end of day||Medium/High||Low/ Medium||Pre-book batches||Zero||Low||Low|