Increasing customer requirements determine company management to improve production and product delivery processes, not only from the perspective of activities performed within a single business entity, but also the supply chain of which it is a participant. Particular emphasis is placed on reducing waste, reducing the number of emerging disruptions, eliminating delays, guaranteeing the quality of deliveries (technical quality of the goods, in accordance with the specification, the appropriate quantity of goods, in accordance with the customer’s order) and increasing flexibility in responding to changing market requirements. Ensuring the effectiveness of these actions is conditioned today by the ability of enterprises to take a comprehensive look at the company operating in a changing environment, with particular emphasis on its relationships with suppliers and recipients, especially first-tier ones.
The global economy, outsourcing processes, the creation of complex supply networks in which links are connected by numerous dependencies, constant fluctuations in demand, as well as trends to lower inventory levels, constitute a source of great uncertainty for many companies. The challenge is to describe and quantify it so that it can be managed rationally. Immeasurable risk, which is uncertainty, is a multifaceted and not always thoroughly recognized issue, especially for companies operating in global conditions. Considering the issues of maintaining the continuity of processes occurring in supplier-recipient relationships, the enterprise’s uncertainty often results from the risk present in business partners, which it is unable to fully control.
An increasingly implemented process aimed at increasing the reliability and safety of activities conducted by organizations is risk management. This process is most often associated with occupational health and safety issues, which results from the need for companies to carry out occupational risk assessments for employees, as required by legal regulations. However, it is also adapted to other areas of the enterprise, such as purchasing or production, with the aim of increasing the organization’s effectiveness in implementing plans and achieving the goals it has defined. The concept of enterprise risk management developed in the mid-20th century and primarily included insurance protection. This means that enterprises focused mainly on the need to identify disruptions whose effects could be insured against. Such actions are classified today as methods of risk transfer. Despite the passage of time, insurance protection and other ways of transferring risk are still among the most frequently used actions in ensuring the safety of processes in an enterprise. Among other things, this is why this issue requires constant consideration. The purpose of the article is to explain the principle of the transfer method against the background of other methods of dealing with estimated risk, to indicate the basic types of transfer, and to attempt to answer the question of whether it actually limits the magnitude of risk, as well as what problems should be recognized during its application.
The essence of transfer and methods of risk transfer
Risk management is most often viewed as a process consisting of several phases. After conducting a risk assessment, the next stage is to limit its level, which, based on the criteria adopted by the company, could not be accepted by it. Unacceptable risk concerns those disruptions whose probability of occurrence and the consequences associated with them cannot be approved by the enterprise as permissible. Areas that require immediate action are burdened with particularly high risk. Most often, this means that the probability of an undesirable event occurring is too high, and the magnitude of potential losses associated with it is too significant for the organization.
Transfer is a common method of dealing with risk that cannot be fully accepted by the company. It consists of the organization transferring the effects of undesirable events (especially financial consequences) to another entity. Most often, these entities are direct contractors and insurance companies. The most common way of transferring risk is using insurance protection. Then, for the payment of an appropriate premium, the insurer obliges itself to bear financial responsibility for damage that may occur in the future to the insured. Insurance companies offer standard insurance, however, other products also appear in their offers, constituting a response to the increasing uncertainty of the business environment. New products, from the point of view of the continuity of flow processes in the supply chain, constitute insurance covering, for example, the risk of losing a supplier, cessation of product delivery, or disruptions related to service delivery. Here, insurance companies require their clients to have excellent knowledge of contractors and the risk they are a source of, as well as the preparation of contingency plans.
The article comes from the magazine “Logistyka” 2/2011.