16.5 Risk Management

As a quality management professional, you usually have your eyes on identifying opportunities to improve your processes: increasing quality and efficiency while reducing waste. When everything is going well, perhaps you can sit back, relax, and enjoy watching your well-designed process humming along to create and deliver exceptional value for your customers. However, in the back of your mind you might have a general feeling of unease: is this it?

The answer should be a resounding no. Even assuming that you have improved your processes to be the best that they can possibly be in the current moment, that general feeling of unease is your instinct telling you that there are things that can go wrong to throw your company’s operations off course. These disruptions can come from many different areas. Often, your customers, financial analysts, and shareholders expect you to have taken these risks into consideration as a part of your process design. At the end of the day, disruptions can result in declines in operational and financial performance. If you are a publicly-traded company, your stock price will get severely punished for inadequate consideration of supply chain risks (Figure 16.1).

One of the biggest blind spots for Lean Six Sigma when it comes to risk management lies in inventory. For instance, Japanese manufacturers such as Toyota have pioneered and popularized just-in-time (JIT), which later became the foundational basis for lean. Their approach focused on eliminating inventory and achieving greater agility to altogether shorten lead times and allow customers to customize their orders. Unfortunately, the quest for absolute leanness can also result in inventories becoming too lean and lead to performance declines.

The reason is simple: inventory acts as a buffer against the unexpected. When everything is going well, it gets easy to view inventory as a waste because it simply sits around until it is needed by the assembly line. As we continue to look for more ways to reduce waste, it becomes very tempting for us to view inventory sitting around as something to be reduced or even eliminated altogether because its value is not apparent until it is needed.

In addition to inventory, anything else necessary to help you serve your customers falls in the same camp: how much spare anything will you need? Too much is obviously wasteful; too little would not allow you to withstand the impact from a sudden event in any of the categories (and more) listed in Figure 16.1.

Risk Management Process: Understanding Your Needs

Risks are basically present when things can go wrong. It may sound simple, but truly understanding your risks requires you to identify not just the most common risks (Table 16.2) but also those hidden risks that you usually do not pay attention to until they happen. There are several things you can do to make sure that you are covering all your blind spots.

Understanding the Likelihood and Impact of Risk Factors

First, you can dig back into your Lean Six Sigma toolbox (Figure 16.2). Benchmarking is something you have done as a part of your process improvement project. By comparing your business processes and performance metrics to your peer and aspirant companies—both within and outside your industry—you can begin to see whether others are doing things that your company is not. There are a number of industry groups such as the Council of Supply Chain Management Professionals who can help you with this endeavor. Second, you can look back at the Process Maps you have put together. What can disrupt your process?

Of course, once you identified some risks that you are not aware of, your work is not done. In fact, these risks may change and new risks may pop up! For instance, the clockspeed at which technology advances, especially in information technology, can create new risks and vulnerabilities. The purpose of monitoring is for you to understand both the nature of how your risk environment is changing as well as what you can do to prepare for these changes.

After you understand both the nature (the probability and potential impact) of a comprehensive set of risk factors, it’s time to assess your risk exposure through using a risk heat map (Figure 16.3). Simply put, your risk probability is simply your assessment of the likelihood of an event occurring. Impact of risk, then, is your assessment of the fallout from an event. To accurately assess both aspects, you may either refer to historical data or collaborate with other people—representatives from other functions or even companies. The reason you want to put these risk factors on a heat map is simply because a risk event is highly likely to take place does not necessarily mean that it should be your priority. Likewise, a rare event but with severe outcome, such as Western Digital experiencing a 60% revenue decrease due to Thailand flooding, should probably command significant attention.

Determining Appropriate Leanness

Having done the above, we are now coming back full circle to deal with the question: “Just what is the appropriate amount of lean?” JIT have long served as the foundation of lean. Paradoxically, JIT can also strip companies of the vital buffer that inventory provides in the event of a disruption. As you read in Table 16.2, many companies were unprepared to deal with risks and their operations relied on inventory to be sustained. The answer to applying Lean Six Sigma without sacrificing the vital protection afforded by inventory may very well be the need to balance between “just in time” and “just in case.”

Remember, inventory is not the only way to protect your company against risks. Supplier diversification allows companies to pursue both different suppliers as well as suppliers in different geographic regions. It really depends on what risk factors you are trying to mitigate. If your company is buying a component from just one or two suppliers, then perhaps finding a third supplier would be wise; if all suppliers for a component are located in the same part of the world, then perhaps you should find new suppliers in a different part of the world. However, such diversification strategies also lower your ability to harness quantity discounts as well as transportation economies of scale to result in higher cost, which is something you might have considered as waste to be reduced in the past.

At the end of the day, you need to carefully balance between cost of inventory and cost of diversification with an eye toward risk exposure. Whereas supplier diversification allows you to prevent certain risks from severely disrupting your supply chain, buffer inventory allows you to recover from risks. Both strategies have their unique costs and benefits. In other words, there balancing between “just in time” and “just in case” should be done on a case-by-case basis. Applying what you have learned above, the multi-step process to risk management would allow you to better deploy your Lean Six Sigma projects without compromising your company’s overall operational stability.