The Procurement and Supply Manager's Desk Reference, + Website, 2nd Edition

CHAPTER 7

Risk Management

Risk is probably one of the most pervasive topics today in sourcing and supply management. The reason for this is quite logical: The more dependent on its suppliers an organization becomes, the more likely that a disruption in supply anywhere along its supply chain can result in the organization's failure to meet its commitments. This is compounded in operations that conduct a “lean” approach to resources, where shortages can shut down production, as well as in operations that are environmentally or politically sensitive, where failure can impact an entire nation or geographic area.

In this chapter, we examine the nature of risk in sourcing operations and how organizations are (or should be) dealing with it.

The Nature of Risk

While definitions of risk are abundant, let's begin our exploration with two definitions that will be useful as we go forward:

• Simple definition: Risk is the chance of something happening that will have an adverse impact upon our objectives.
• More complex definition: Risk is a measure of the inability to achieve program objectives within defined cost, schedule, and performance constraints.

In this chapter, we use these two definitions interchangeably. They serve as an anchor point in our illustrations.

Why Is Understanding Risk Important?

Risk affects many aspects of the sourcing process; it is a guiding consideration when selecting suppliers. We select those suppliers that are most likely to meet our stated requirements: suppliers ...