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Which disruptions lose you more money: Black swans or routine risks?.

RiskDisasters and UnrestMarket VolatilityRisk MitigationBlog+-
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When managers think about risk, they often look to the extremes. The word itself is often associated with dramatic events which change the world. But the losses we suffer often come from more mundane sources.

The various risk types that impact upon organisations most is one of the key questions of our latest research. You can get involved in our research here (and get yourself a free report).

Dwelling over past risks which have altered the course of business, images of the September 11th attacks, or the 2013 Japanese tsunami or the global financial crisis first spring to mind. Similarly, when managers build their resilience plans, they worry about terrorist attacks or major political events.

Past Procurement Leaders research has found that procurement professionals spend a lot of time worrying about events which have a low probability of occurring. Whereas the more routine risks of poor weather or machine downtown tend to catch out business and cause higher number of incidents.

This is not so much a fault of buyers, but a weakness of human psychology. People tend to suffer from ‘availability bias’. That is, when they attempt to analyse problems they look to the first memories that spring to mind. This may relate to a conversation held recently or a story that read in the news.

The latter is the worst place a person can prepare for risk analysis. Journalists tend to look for the more dramatic stories that over-emphasise the effects of a particular event. Moreover, people’s tendency to generalise events and subconsciously weave a coherent narrative from disparate incidents often creates a false sense of urgency around press reporting. If an earthquake occurs, the management becomes worried about making their supply chain ‘earthquake-proof’ for a week, and then all is forgotten once the news targets the next story.

To quantify this dynamic in supply chain management, and measure the underlying exposure to this psychological flaw, Procurement Leaders is aiming to calculate the financial impact of different risk types. How much is really lost from black swan events? Do they impact your business as much as you worry about them?

If you would like to see how much your risks are costing your and would like to compare this to the wider Procurement Leaders community, take our survey here.

 

Jonathan Webb
Posted by Jonathan Webb