How is Your Risk Appetite Looking?

In an era marked by rapidly evolving markets, global uncertainties, and unprecedented disruptions, supply chain resilience has emerged as a critical determinant of an organization's success. The ability to withstand and adapt to unprecedented times has become the mantra for shippers everywhere. Risk appetite has gained considerable attention as a key factor in shaping resilient and agile supply chains.

Risk appetite serves as a guiding principle that allows companies to strike a delicate balance between risk and reward. It empowers decision-makers to proactively assess, and manage uncertainties while protecting their operations, reputation, and bottom line.

What is Risk Appetite?

Risk appetite is the amount of risk an organization is willing to take in pursuit of high-value objectives. Having a clear and well-defined risk appetite statement helps establish accountability and readiness in the supply chain. These risks can come from internal factors at the company or external factors. 

Some of the internal factors of risk are personnel, poor foresight, and lack of organization. These are things within an organization's control. These risks are more easily mitigated and can be handled easier. For example, inventory management issues can be handled through internal processes and fixed. 

Whereas external risks have more to do with supply, demand and nature. These are uncontrollable risks. The factors that are outside the control of the business despite the best-laid plans. For example, a hurricane comes and shuts down a supplier for a few days putting manufacturing behind schedule. 

Risk Appetite vs. Risk Tolerance 

Risk appetite is the piece of the risk pie an organization takes for day-to-day activities. Whereas, risk tolerance takes it a little step further. Risk tolerance sets the acceptable level of variation from performance goals. Risk appetite sets the boundary of expectations whereas, risk tolerance pushes that boundary for the advancement of strategic goals. 

For example, when implementing a new TMS, software that is critical to the day-to-day operations of the organization but stands to benefit the organization as a whole, there might be some more risks allowed in implementation, like errors that stop a day's work. Versus implementing a new scheduling platform that is less important. 

Both are major parts of an organization's supply chain resilience.

Defining Risk Appetite for the Supply Chain

Taking the time to define a company's acceptable level of risk can lead to a seemingly endless “what if” maze. What if there is a hurricane that wipes out a warehouse? Or, what happens if a key supplier goes out of business tomorrow? What if a key part of the workforce is sick and can’t come in? 

All valid concerns affect a supply chain but have wildly different levels of probability. A supplier that has been in business for 30 years likely won’t be going under overnight. There’s a pretty low chance of a hurricane destroying a building if it’s the middle of winter. It’s important to remember the likelihood of this happening. Once the probability of these risks happens, establish what the worst-case scenario could be and start from there. 

Risk appetite can be evaluated through analysis of acceptable risk boundaries and actions (what exactly is the organization willing to do within the "acceptable" level) and risk exposure (based on a desired set of actions and outcomes, does the exposure increase, decrease or stay the same?) The level of exposure influences the risk appetite for any specific project or approach, and possibly the overall direction an organization takes.

Establishing a Risk Appetite Statement

This is where it all starts. Pen, paper, and procurement. The head of procurement will more often than not be the one to lead the charge. Shippers can express their risk appetite through the creation of a statement. Like core values, a risk appetite statement helps guide organizational risk management.

This statement should include risk-taking approaches and focus, risk mitigation. When drafting a risk appetite statement consider and include all necessary involved stakeholders, consider the organizational culture and overall focus on risk tolerance and risk appetite in specific scenarios and within the industry as a whole. Define the acceptable level of uncertainty or volatility in any statements and decisions. Reconcile risk appetite and risk tolerance with current exposure based on existing deployments and assets.

Ensure that your current policies and procedures align with the new statement, especially across all partners. The last thing you want is to not communicate with 3PL partners and have yet to make any significant progress in mitigating risk. 

Using Risk to Build a Resilient Supply Chain 

Everyone is on the same page, risk appetite has been declared, risk tolerance has been established. Now what? Put it into action. Look for vendors and logistics service providers that align with the company’s objectives. The whole goal of knowing where the boundaries are for risk is to use it to build a resilient supply chain.  

The pandemic taught everyone the importance of having resilient supply chains as well as how unpredictable those external factors can be. A risk-resilient supply chain doesn’t mean that interruptions never happen. It means that they are better at handling disruptions and challenges as they come. 

Maintaining a resilient supply chain might seem like an aggressive undertaking, but it doesn’t have to be. Focusing on end-to-end visibility helps manage a lot of the unknown. Getting real-time data and insights into the current status and location of goods, throughout the entire supply chain makes unpredictable mistakes much easier to catch before significant problems occur. 

Not Sure What Your Appetite is?

Not sure if the risk appetite is too large or not aggressive enough? No worries. Redwood Logistics has plenty of supply chain experts who can advise on how to best handle risk within your supply chain. Contact us and an expert will be happy to help you build a resilient supply chain that aligns with your risk appetite.