A lesson for those designing contingency and mitigation responses to risk events is that too much complexity can lead to its own problems. Sometimes our efforts to provide iron-clad guarantees that our supply chain won’t suffer loss result in systems that can protect against the risk events we can foresee, but mask our ability to respond to the unexpected or “black swan” events.
Good research shows that where we have protections in place, this alters our risk appetite. An everyday example is the more we are required to use seatbelts and vehicle safety systems are improved, the more risks we take on the road. An extreme example comes from skydiving where Booth’s second law states “the safer skydiving gear becomes the more chances skydivers will take in order to keep the fatality rate constant”. So it would appear that having risk mitigations in place that are too robust can provide a false sense of security!
It has also been shown that we transfer this risk appetite “adjustment” to others in the system. For example, it is common for car drivers to pass closer and faster to cyclists that are wearing helmets, assuming they are safer than they actually are. In a supply chain context this might result in decisions to hold less safety stock on the assumption that your partners have got this covered.
The challenge with complex risk management actions is that they both provide a false sense of security and because they are complex they contain multiple opportunities for failure. John Doyle of Cal-tech has coined the term “robust yet fragile” to describe such systems. Charles Perrow in his work on the space shuttle disaster/s noted that “in complex and tightly coupled systems” failures are inevitable!
So part of the solution is certainly to maintain a risk management approach that stresses the need for simple solutions. Allied to this is a need to combat the false sense of security that mitigation actions can provide. This means never assuming that your “fix” will work and never pulling back from your monitoring activities and environment scanning. You will rarely be able to predict a “black swan” event, but being the first to see it provides some advantages.
The key to reducing risk in a system like a supply chain is to treat the system as a whole, rather than harden up an individual node. The node may be protected but the overall system can still fail. No single firm can usually impose solutions on the whole supply chain, therefore they must collaborate with their supply chain partners to manage risk.
Yossi Sheffi in his book “The Resilient Enterprise” notes two benefits of collaborating with supply chain partners to reduce risk. Firstly, it pools the combined experience of all the partners so that they can learn from each other. Secondly, it increases the number of “eyes on the job”. The more people there are scanning the environment, the more likely an emerging event will be observed. Critical supply chain events are not perceived in the same way by all partners according to Holmlund-Rytkönen and Strandvik (2005). Therefore these different perspectives not only mean events are not missed, but also the consequences of the events will be better understood. The combination of views will also act to normalise the risk appetite for the group. No one party will see the metaphoric “bicycle helmet” on their partners’ heads and therefore pass on more risk.
So to deliver risk management solutions that won’t let you down, consider the following:
- Keep countermeasures simple.
- Don’t assume countermeasures guarantee the risk is eliminated.
- Keep scanning the environment even after countermeasures are in place.
- Monitor your risk appetite and ensure you are not taking on more risk because you have countermeasures in place.
- Collaborate with supply chain partners on risk management – you will learn more and increased eyes on the environment will help.
If you would like to know more about how to use collaboration to help you manage risk, please feel free to contact us at firstname.lastname@example.org or call +61 (0)419 581 705.