Risk is intrinsic to doing business. No part of an organization or phase of product development is ultimately free from threat, and much of a company’s success and long-term market viability depends on its ability to map and manage risk.
At Pivot International, we’ve built safeguards into every phase of the product development process to protect against threats and successfully bring our client’s products to market. Some of the measures we take to manage risk include:
- Utilizing SMT technology to ensure accurate execution of high-volume production
- Operating company-owned facilities worldwide to ensure complete transparency and oversight
- Leveraging consolidated supply chain systems to withstand climatic, currency, and geopolitical disruptions
Successful risk management requires a host of competencies, including a systemic view of a company’s operations and complex scenario/contingency planning. But common to all threat-reduction efforts are five key strategies that companies can deploy to map and effectively manage risk. Here’s how to implement these strategies to protect your business.
Risk reduction begins with taking account of potential threats to a project. It is helpful to distinguish between risks that are internal to the organization (such as a lack of formal processes or losing a key team member) and risks that are external to it (such as an electronics component shortage or tariff legislation that poses supply chain challenges). At this stage, it’s essential to take a thorough accounting of all risks, however small, and record them in a risk register. Only later in the process may risks that initially seem minor or remote be revealed to be serious threats.
Once identified, each risk needs to be analyzed along two lines: First, by how likely it is to occur. Second, by the degree of damage it could cause. The first line runs the range of extremely unlikely, probable, imminent, and inevitable. The second line runs the spectrum from negligible, marginal, moderate, significant, critical, and catastrophic.
Use a risk matrix to multiply the likelihood of a threat’s occurrence by the degree of its potential damage to generate an overall risk score. Keep in mind that risk can be conceived of and assessed in more or less granular ways and that risk matrixes can be created to suit your needs. The more simple a project, the fewer risks it will face, and streamlined matrixes are generally sufficient for planning purposes. Complex projects, on the other hand, are inherently more vulnerable and will necessitate complex matrixes for reliably rating risk.
The whole point of managing risk through identification, analysis, and rating is to provide the raw data necessary for reducing this risk through strategic scenario/contingency planning. It’s imperative to involve all key stakeholders in this phase and to delineate roles and responsibilities in the event the risk becomes a reality.
The likelihood of a risk occurring and the degree of damage it can cause are ever-changing and should be continually monitored. Today’s security may turn out to be tomorrow’s threat, and risk-assessment measures should be routinely undertaken. No risk register is set in stone, and a comprehensive monitoring plan is essential to ensure it remains up-to-date.
Why Risk Management is Necessary for Procurement
Now that we’ve outlined key strategies for mapping and managing risk, let’s consider specific risks that arise in procurement and how to mitigate them.
Risk management should be an essential part of any procurement strategy. While strategic sourcing and buying help to mitigate many high-profile issues, there’s a significant risk of experiencing unexpected price hikes from suppliers under long-term contracts in both direct and indirect sourcing.
A PESTLE (Political, Economic, Sociological, Technological, Legal, and Environmental) analysis for a specific market or industry can be helpful to run. It serves to highlight risks that could affect an organization from the outside, and in turn, impact pricing or lead to scenarios where suppliers might need to raise prices during the life of a contract.
Regardless of the relationship that companies have with suppliers, price increases can still be challenged, and justification for any increases can be requested. Additionally, in line with the Consumer Price Index, companies can choose to limit price increases. To prevent the percentage from being indiscriminately applied, a transparent cost breakdown should be provided.
At Pivot, we’ve been forging strategic partnerships with businesses of all sizes for nearly 50 years. Our partners trust in our expertise and rely on us to help guide them through all aspects of the product development process, including risk management in procurement. If you’d like to learn more about the winning difference Pivot can make to your business, contact us to set up a free consultation with our team.