Risk Metrics: VoR (Velocity of Risk) in Managing SC Risk

VoR, or Velocity of Risk, is a concept that appears now and again and discussions of risk management. The basic concept is that in addition to the impact of a risk event, one also wants to understand the velocity at which that event reaches a given level of impact once certain conditions have been met.

For example, in the supply chain space, consider a new product launch where early indications are that sales will not be in line with projected quantities (or vice versa). There is of course a time period X during which an analytical team can monitor the delta between expected and actual sales and there is some delta threshold at which that team can decide the launch has entered either a positive risk zone (sales significantly higher than expected) or a negative risk zone (the opposite). VoR would add another dimension to this analysis, namely, the speed at which the delta grows.

This is important because different supply chain risks increase velocity at different rates. For example, in some consumer markets, decisions about the viability of a product are made within days of launch. In these cases, point of sales data is monitored in real-time and if the product has not attained a minimum sales threshold within as little as 72 hours, the launch is considered a failure and several risk mitigation actions are put into place immediately (reducing or stopping production, canceling procurement buys, etc). The reason for this rapid action is that in these markets demand risk has a high VoR: once a product launches, the liabilities accumulate quickly. Indeed, after only 30 days on the market, some companies can accumulate almost a year’s worth of finished product and supply liability. In this case, the analytical team must quickly make a “keep or kill” decision to stop the accumulation of exposure as rapidly as possible.

There are other risks with equally high VoR that are not often managed with this same level of rigor. The best example of this phenomenon is good contamination. Time again in the past decade food contamination events  have continued for weeks after the initial risk signs became visible before supply is curtailed and product removed from store shelves. Indeed, I have written before that most major US and Canadian food chains are sitting on a major pool of high VoR risk few have quantified in their private label products (which can be as high as 40% of all packaged product in some stores).

In my experience, most post launch analyses do not compute VoR and they are these deviations are not considered when determining the appropriate moment to modify (either positively or negatively) procurement and production decisions in response to a significant plan-to-actual demand deviation. VoR calculations, applied in these scenarios, might be a useful tool for SC risk managers to consider.

Carlos Alvarenga

Founder and CEO at KatalystNet and Adjunct Professor in the Logistics, Business and Public Policy Department at the University of Maryland’s Robert E. Smith School of Business.

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