The Risk Quadrant in Supply Chain Management

Supply chain management involves the coordination and optimization of various activities related to the production and distribution of goods. While this can help businesses increase their efficiency, it also comes with inherent risks. In this article, we will examine the risk framework spread over two dimensions - probability of occurence and its business / financial impact - and into four quadrants as shown below.

Low Probability Low Impact (LPLI) Risks

LPLI risks are supply chain management risks that have a low chance of occurring, but may also cause a relatively small negative effect if they do occur. These types of risk are often overlooked when assessing supply chain risk, because they tend to be less dramatic than high impact risks, such as natural disasters or economic downturns. However, LPLI risks should still be taken into account when developing and implementing a robust supply chain risk management strategy.

Some examples of LPLI risks include supplier-related issues such as non-compliance with standards or regulations; problems with transportation logistics; software glitches; and incorrect documentation. Each of these risks can cause disruption to the supply chain, resulting in delays and added costs.

Low Probability High Impact (LPHI) Risks

LPHI risks are supply chain management risks that have a low chance of occurring, but may cause a relatively large negative effect if they do occur. These types of risk, such as natural disasters or global pandemics, can cause serious damage to the firm's operations, and hence should be taken into account when developing and implementing a robust supply chain risk management strategy. we witnessed it during COVID pandemic that continues to impact us every now and then.

High Probability High Impact (HPHI) Risks

HPHI risks refers to potential risks that have a high likelihood of occurring and could potentially cause significant negative impacts. These risks can include high levels of supply chain complexity, production delays or disruptions, unexpected demand fluctuations, unanticipated disruptions in the availability of raw materials or components, and inadequate supplier performance.

High Probability Low Impact (HPLI) Risks

HPLI risks is a type of risk that occurs more often but has minimal effects on operations and performance. Examples of such risks include late deliveries, minor disruptions to production lines, small product defects, and data inaccuracies.

Risk Mitigation Strategies

Organizations must proactively identify and manage these risks in order to ensure efficient and cost-effective operations. Risk assessment tools and statistical methodologies such as total cost analysis (TCA), value-at-risk modeling (VaR), and Monte Carlo simulation can help organizations to accurately evaluate these risks in terms of their potential financial impacts. Additionally, strategies such as supplier diversification can be used to reduce supply chain disruption risk by spreading out sourcing across multiple vendors. Companies should also implement risk management plans that are proactive and prescriptive in nature. Finally, it is important to maintain communication with suppliers and customers so that changes in demand or supply can be quickly identified and addressed. By proactively building a robust risk mitigation strategy, organizations can ensure smooth operations and reduce the risk of major adverse business impact.