LGT5015 Chap.7 Supply Chain Risk and Resilience
Supply Chain Risk and Resilience
Quantification has a boundary
Risk exposure combines probability and impact for a named event and supports comparison of avoidance, reduction, transfer and retention.
This chapter distinguishes probability reduction from impact reduction, compares mitigation cost with exposure removed and separates known-unknown scenarios from unknown-unknown failures that require flexibility, anomaly detection and fast recovery.
Probability and impact do different work
A frequent low-severity problem and a rare catastrophic loss can have similar expected exposure but need different controls.
Pre-loss action often reduces probability through prevention, qualification or monitoring. Post-loss action limits impact through backup capacity, recovery plans or alternative routes. State which arm changes, because a control that leaves the other arm untouched still leaves residual risk.
Compare before and after on one basis
Probability should be written as a decimal and impact in a stated currency and period.
Calculate initial exposure, residual exposure and the reduction, then deduct the control cost when evaluating expected benefit. The calculation is a decision aid rather than a prediction.
Record the source or assumption for each input and identify the value whose change would reverse the recommendation.
Named uncertainty supports scenarios
A known-unknown can be described even though its timing, probability or severity is uncertain. Scenario ranges, stress tests, early-warning indicators and trigger thresholds are appropriate.
Monitor measures such as lead-time variance, service reliability, quality and exception counts, then connect each indicator to the financial or customer objective it threatens.
Unfamiliar failure needs resilience
An unknown-unknown cannot be priced honestly before the failure mode is understood. The operating response is to preserve options, redundancy, flexibility, anomaly detection and fast learning.
Time to detect, time to respond and recovery time become more meaningful than a guessed probability. Strong governance also gives unusual signals an escalation route even when they do not match an existing risk label. Finish every recommendation with residual exposure and the contingency that remains necessary.
What this chapter covers
- 01
Probability and impact
- 02
Risk exposure
- 03
Avoid, reduce, transfer, retain
- 04
Risk leverage
- 05
Known-unknown scenarios
- 06
Unknown-unknown resilience
Worked example · free
Evaluate a probability control
- 2Calculate initial exposure.
- 2Calculate residual exposure.
- 4Deduct control cost.
Key terms
- Risk Exposure
- Expected loss calculated as probability multiplied by impact.
- Risk Reduction
- Action lowering the probability or impact of a loss.
- Risk Retention
- Accepting residual exposure when action is unavailable or uneconomic.
- Known-Unknown
- A named risk whose timing or severity is uncertain.
- Unknown-Unknown
- An event or failure mode that cannot yet be defined.
Supply Chain Risk and Resilience FAQ
What does exposure arithmetic contribute?
It places named risks on a comparable expected-loss basis and supports before-and-after evaluation of controls. The result depends on documented assumptions and does not guarantee what will happen. Use sensitivity across a plausible probability or impact range, and state the threshold where the preferred mitigation changes, rather than presenting one uncertain input as settled fact.
How do known and unknown risks differ?
Known-unknowns support scenarios, ranges, indicators and triggers because the risk can be named. Unknown-unknowns require options, redundancy, anomaly detection, flexible operations and faster learning. Their performance measures should differ as well. Do not force both into one probability table.
What should follow a mitigation calculation?
State the remaining exposure, the assumption most likely to change the result and the contingency if the event still occurs. A worthwhile control rarely removes all risk. Add the trigger that activates the contingency and the owner responsible for monitoring it, so the calculation becomes an operating response rather than a static estimate.
Exam move
Recompute exposure with probabilities as decimals, then classify whether the control changes probability, impact or both. For unmodelled events, switch to resilience metrics instead of guessing inputs. Use a before-and-after table with probability, impact, exposure, control cost and residual risk on the same period and currency basis. Record the assumption most likely to reverse the ranking.
Next, sort possible actions into avoid, reduce probability, reduce impact, transfer and retain, and state what remains with the firm under each. Build two contrasting scenarios: a named customs delay with uncertain timing and a failure mode that cannot yet be defined. Give the first ranges, indicators and triggers; give the second options, redundancy, anomaly escalation and recovery measures.
Connect each early indicator to a customer or financial consequence. End every answer with four elements: selected control, residual exposure, action trigger and contingency. This prevents a mitigation proposal from being mistaken for a promise that disruption is impossible.
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