Ever heard of the phrase "too much of a good thing"?
In risk management, this sounds counter-intuitive. Why would you want to limit your upside? Think of it like overeating at a buffet; you show up starving and this delicious, unlimited display of food is laid out in front of you. You’re taking a positive risk that you’ll enjoy your meal, for the potential positive benefit of feeling full & satisfied. So, you dig right in, and you realize the benefits.
The following morning you’re sick to your stomach and you quickly regret not limiting yourself. A negative risk event that was extremely unlikely to happen before you ate just became a reality. This is an example of taking on too much positive risk in everyday life. “Too much of a good thing.”
Here’s a more business-oriented example:
You’re evaluating whether to accept an order to build 10,000 units of a product in 12 months, to be paid upon on-time product delivery.
- Positive Risk: 35% increase in annual revenue.
Assuming everything goes smoothly, this will translate to a positive benefit once the order is delivered. Since it hasn’t yet been realized, it’s an uncertainty, and therefore a “risk”
Negative Risk: Delays to other orders
Accepting this order may affect your ability to successfully produce existing orders on time. If you don’t have data or a reference to forecast the impact on your factory’s capacity, then this should be considered a highly probable, highly impactful event. The odds of your positive “risk” becoming a positive “benefit” are affected. Ideally, you want your odds of success to be as high as possible.
Next Steps:
- Analyze impact to capacity
If you have an existing ERP system that grants this capability or an alternative software solution, use it! Make sure existing variables are up to date for throughput rate, lead time, etc. Otherwise, cycle time & utilization studies mixed with an aptly set up Excel spreadsheet will get the job done.
2. Quantify the cost vs benefit
Can the order be completed on time with the current production schedule? Will it cause other orders to be delayed? Can you afford the impact to those customer relationships? Realistically, on time delivery should never be compromised, so if the odds of a delay on any order are high, you should act.
3. Identify opportunities for improvement
How can you increase your capacity to support the order?
a. Hire an additional shift/offer overtime: More labor typically translates to more productivity. If the resources are available quickly without the cost outweighing the benefits, this is a quick route.
b. Figure out your bottlenecks: What’s limiting capacity? Yield issues? Throughput? Identify these areas and the ones that can be fixed without adverse impact to the factory.
c. Act: Select solutions that are the right combination of the best improvement with the lowest effort and likelihood of failure. This will improve your odds of successfully completing and delivering the new order.