Source: Image of danger sign, factory, cloud with lightning, images by Video Scribe, License held by Jeff Carroll.
Hi, I'm Jeff. And in this lesson, we'll learn about risk management and how it's used by organizations in their decision process. So let's get started.
Risk management is the process of classifying and evaluating potential hazards for an organization, and developing a systematic response, or non-response, to avert or lower the damage. Risk management is something that large and small organizations must consider, since it can inform decisions that can impact the success of a business.
There are two types of risks that need to be identified and managed. They are speculative risk, which is a type of risk that can create a loss or gain in the situation. For example, there are a number of risks associated with the design of a new product. And those are categorized under speculative risk.
And pure risk, which is a type of risk that creates only a loss or no loss situation. For example, if a hurricane destroys a building, that is a pure risk situation with a loss. If it doesn't destroy the building, that's the no loss situation.
There are five steps in risk management. Let's run through each with an example demonstrating each step.
Number 1, identify risks and potential losses. If a company has a risk, then a new product may be delayed due to the lack of production supplies. It should be identified as a potential loss.
2, measure how often and how severe the losses are and what impact they will have. If the new product suffers from production delays, risk management should document how this might occur, how severe the delays might be, and the cost to the business for those delays.
3, consider the ways an organization can deal with the risk. Some of the methods to deal with risk are risk avoidance, which is avoiding or stopping the risky practices, risk control, which is attempting to minimize the frequency of risky practices, risk retention, which is when risks cannot be avoided, so the cost of risks are assumed to be necessary, and risk transfer, which transfers the cost of large risks to another firm. For example, the use of insurance is a method of risk transfer.
One method our example organization might use to deal with the production supply risk is to line up additional suppliers for each production material. This is a method of risk avoidance.
Number 4, implement the risk management program, which is an organization's plan to mitigate and deal with potential risks both internally and externally. Our organization should make sure everyone in the production line is familiar with the plan to mitigate the risks associated with supply issues.
And 5, monitor and evaluate each risk. It's essential to make sure new risks are being considered, and that the organization is reassessing risk based on new information and new processes. Perhaps when our organization begins using other suppliers for the production materials, additional risks arise due to the poor quality of the supplies. That is a risk that should be managed also.
All right, well done. In this lesson, we learned about risk management. We discussed the two types of risk an organization might face. And we talked about the five steps in risk management.
Thanks for your time, and have a great day.