Risk Management Approaches

Posted on December 2, 2010 by

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Weaving throughout the Business Analysis Body of Knowledge (BABOK), ISACA content & CobiT, Lean Six Sigma best practice and the Project Management Body of Knowledge (PMBOK) / PRINCE 2 is the concept of proactively managing risk.  Risk is based on a probability of an event occuring (positive and negative) and the impact should that even occur.

The Risk Priority Number (RPN) helps focus attention on the top 10 or 15 risk events that may occur.  Once an RPN has been established, proactively monitoring risk conditions kicks in.

For example consider that following risk event might – delayed shipping due to transportation availability.

During the busy holiday season, Ted notices that receiving his favorite reference book for his students can slow down to a crawl (Norm Abrams “I Am the Nails of Woodworking, Bob Villa was Just a Cover”, 2004).  His  standard shipping may take 5 to 6 days instead of normal 3 day process.  He normally freezes enrollment on Tuesday night to ensure sufficient books (but no more than necessary).  His classes fills at 12, but he will run them with 5 students.

To proactively manage this risk, Ted can do a few things:

  • either order more books than needed for his next class (not a really “lean” adhering practice and
    Woodworking

    Ted's woodworking

    likely to drive up fixed costs) or

  • for a 25 day period, pay 2% more for expedited, two day delivery (driving up cost but on a variable cost basis).
  • enforce a Tuesday registration (this may prune his student list by 2 or 3 since his classes are often an impulse decision)

Ted opts to pay a little extra to ensure timely deliver without adding excess inventory.  This simple risk management strategy can be applied to more complex situations and scenarios.  The key is to balance the possible solutions and impact, comparing the pluses and minuses.  This management strategy also helps to unearth secondary and residual risks (for example expedited shipping may result in higher than normal damage to Ted’s reference books.)