You Can't Prevent Volcano-Sized Risks

When it comes to managing risk, which is the better approach: prevention or response?

That's an intriguing question particularly in light of recent unpredictable events, such as the eruptions of Eyjafjallajokull and I really enjoyed reading the insights Bruce Arntzen offers in his thought-provoking blog post, "How Do You Prevent Volcano-Sized Risks? You Don't."

Arntzen reminded me that last winter, the MIT Center for Transportation & Logistics conducted an online survey to get the business community's pulse on the question of prevention vs. response. The survey asked respondents whether they should invest in planning and implementing risk-prevention measures, or planning and practicing event-response measures.

And, as you might expect, the results were telling.

More than half (54 percent) of those polled favored prevention. 30 percent said both. And 16 percent leaned toward response. Among respondents who identified themselves as supply chain risk managers, the results were even more one-sided. 65 percent said prevention warranted investment. 30 percent said both. And a mere 5 percent favored response.

What answer would you choose?

I'll agree with Arntzen, who says that the optimal approach to risk prevention is the balanced approach.

After all, there are bound to be supply chain disasters both "larger scale" ones, such as volcanoes or earthquakes, and "smaller scale" ones, such as a fire that destroys a warehouse for a critical supplier that simply can't be predicted.

That's why, as Arntzen stresses, it's important to remember these two fundamental lessons:

1. Your comprehensive risk prevention strategy need to address both prevention and response.
2. You need to remain vigilant about the strategic value of each supplier in your network.

Gary Lynch, global leader of Marsh's global supply chain risk management practice, told Procurement Leaders that the volcano has disrupted supply chains to an almost unprecedented extent. Many companies have been caught off guard largely because they weren't prepared for the level of interdependence between their suppliers.

So, it bears repeating: Today's global, interconnected supply chains demand a balanced risk mitigation strategy that includes both prevention and response. Prevention works best with well-understood risks that occur frequently. On the other hand, having a disruption response plan ready will prove invaluable when an unpredictable (and yet unfortunately, inevitable) disaster strikes.

TAGS: Finance
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