Risk-Appetite Statements Set Accountability While Aiding in Business Success
The coronavirus (COVID-19) pandemic has left supply management organizations scrambling to reduce supply chain risk, whether concerning sourcing, product availability, employee safety or other areas.
It’s also causing many organizations to revisit how they approach risk — as well as how much risk they are willing or prepared to take or accept before they seek to reduce it. The latter concept is called risk appetite.
Gartner, the Stamford, Connecticut-based global business research and advisory firm, has developed a four-step framework for writing a risk-appetite statement. According to Gartner research, only a third (35 percent) of companies have such a formalized statement, and 11 percent have developed function-specific risk-appetite statements.
Having a formal risk-appetite statement can help companies establish “accountability and readiness for managing supply chain risk to drive business success and value creation,” state the guidelines, which are featured in 4 Steps to Write a Supply Chain Risk Appetite Statement: Guidebook for Supply Chain Risk Management. Such statements will have, that guidebook states, “measurable indicators that are directly connected to the value chain and can impact strategy, competitiveness and innovation.”
The four steps, according to the guidebook, are:
Develop risk-appetite buy-in. Just as it’s essential to align on business goals across functions, so it is with risk appetite. Cost increases, misaligned priorities and program failures are just some of the issues that can occur when there is a lack of understanding about the business’s risk appetite.
Assess risk preferences. The statement should include only the most significant risks, not every potential risk. Holding a workshop with business-unit (BU) leaders can aid in determining what they consider to be the most significant risks.
Gather business input and draft appetite statements. “Supply chain leaders should collaborate with BU leaders to craft specific actions from a high-level risk appetite statement,” the guidebook states. Not doing so can lead to ill-made decisions “that fall outside the range of acceptable risk.” Additionally, ensure that these actions make sense from a supply chain view.
Communicate the supply chain risk appetite. Develop a risk-appetite communication plan that is stakeholder-centric and guides stakeholders in how to use and apply the risk-appetite framework. It’s important to continually review the organization’s risk appetite and make adjustments, the guidebook states.