CIPS L5M2 Definitions you must know
Managing supply chain risk or CIPS L5M2 definition of risks, hazards, exposure and risk appetite that you quickly need to remember;
- Risks: Risk is an effect of uncertainty on objectives and in procurement that means the chances that an event will cause a loss in a given deal or contract
- Hazards: Hazard is something that will cause harm if it is not avoided for example, relying on a single supplier who is in a country that is politically unstable
- Exposure: Exposure is the measure of potential loss arising from the risk if it occurs. Example, how much you can lose if your main supplier is unable to deliver
- Risk appetite: Risk appetite is the type and level of risk an organisation is comfortable taking. An example could be accepting financial risks under $10,000, but ensuring no single supplier is holding more than 40% of category spend
GET CIPS L5M2 SUMMARY GUIDE: DOWNLOAD CIPS L5M2 Definition of Risks Hazards Exposure and Risk appetite PDF
Practical look at CIPS L5M2 Definition of Risks, Hazards, Exposure and Risk appetite
Hazard vs Risk vs Exposure in practice
To understand these in practice lets us assume that you just got a job as a procurement officer in a given organisation and you decide to assess your supply chain to see where vulnerabilities are.
- What hazards are you dealing with?
Hazard is the potential source of harm and in this case, you find out that you supplier is located in an area prone to floods when it rains.
You may look at that and say, “ok rains don’t come every day, so we are ok”
But the issue here is not the rain time table, the issue is what will happen if that supplier fails to deliver
In short how exposed are you because of that hazard?
- What is your supply chain level of exposure?
Exposure is the measure of what you are likely to lose if things don’t go according to plan.
In the case of your supplier in the flood-prone area your exposure will depend on how much of your supplies come from that particular supplier
Let’s say 70% of your supplies (category spend) is tied to that one supplier, that means you stand to incur that much loss if the supply is interrupted
- What exactly is your supply chain risk?
Risk is the effect of uncertainty, in this case, on your supply chain objectives. Your objective is to get 70% of supplies from this supplier in a region often affected by floods.
The floods may affect the supply but the supplier could also have a plan to have the supplies not interrupted if it floods.
The uncertainty in your case is the high chance of disruption to your operations that is the likely outcome if the floods occur
Risk Appetite, risk tolerance and risk threshold
The way you handle risk will depend you risk appetite, tolerance and threshold
Risk appetite is level of risk an organisation is comfortable taking. And organisation risk appetite will depend on figures they have set a side as part of the risk tolerance, in short, the acceptable variation around the appetite.
An example could be accepting financial risks under $10,000, but ensuring no single supplier is holding more than 40% of category spend.
To effectively manage risk, an organisation will have to set a risk threshold. Risk threshold is the set limit which if crossed an action has to be taken
STUDY SUMMARY
Here is a quick summary when looking at CIPS L5M2 Definition of Risks Hazards Exposure and Risk appetite topic
Question 1: What is the difference between risk and hazard in CIPS l5m2 exams?
Hazard is the source of the potential harm while risk is the effect of uncertainty caused by exposure to the hazard.
Question 2: In managing supply chain risks, what does exposure mean?
Exposure is how much an organisation stands to lose if it is affected by the identified hazard
Question 3: What is a risk appetite statement?
This a statement describing the type and level of risk an organisation is willing to accept. For example, “all contacts valued over $5,000 must be awarded through competitive bidding”
Question 4: How do I quickly remember the difference between hazard and risk?
Hazard “can cause harm.” while Risk is the “chance harm happening.”
QUICK LINKS: Check out questions on CIPS L5M3 here if interested
Whenever you are ready here is how I can help you:
- Mastering Logistics Management. This course is designed for ambitious people who want to build profitable and scalable logistics operations from day one
- Managing supply chain risk. Here you will be able to evaluate a variety of tools and techniques to establish the level of risk in supply chains and to recommend and apply ways of avoiding, mitigating, or managing risk.
- Managing contractual risks. In this case you will be able to spot risks surrounding contract formation and impact of failure in a contract as well as what you can do in such cases
- Promote your business or product: lets talk about your business, product or service and promote it through our videos and newsletter contract: moses@zeritenetwork.com