Psychology plays a much larger role in risk assessment and risk management than most people realize, says John J. Brown, director of supply chain risk management at Coca-Cola. After researching this topic for two years, Brown has come to understand that risk assessment depends on what we perceive as important and a whole host of experience factors play into that, including what we know, what we don't know and what we choose to remember, he says.

Additionally, our perception of risk is highly influenced by choice - whether we are exposed to a risk by our own volition or because it is forced on us - and the degree of control we have over the risk. "If we are in control of a situation, we feel much better about it, which is why a lot of people choose to drive rather than fly, even though statistics show they are much more likely to die in a car accident than from traveling via air," says Brown.

"Another important thing to realize is that risks may exist, even though we don't know about them or fail to see them," says Brown. This is the "black swan" aspect of risk perception, which is based on a book by that name by Nassim Nicholas Taleb. The name refers to a time in Europe when no one believed that it was possible for swans to be anything but white, until explorers came across black swans in Australia. "The term has come to mean a risk event that no one believed existed or was possible," Brown says.

The impact is that companies may be focusing on the wrong risks, he says. "We end up managing the risks that we perceive to be of a higher likelihood or higher consequence, but those may not be the most important risks to our company. That is why it is important to understand the role of psychological factors on risk identification and risk assessment."

One of the first steps companies should take in combating this tendency is to have training sessions to help people calibrate their understanding of risk, he says. "Because risk perception is memory based and experience based, we need to help people understand the way their minds work when it comes to perceiving risk," he says. One of the tactics Coca-Cola has employed is to add weight to the consequences of low-likelihood risks to make sure that black swans are not ignored.

Coca-Cola also takes an important step after identifying risks, Brown says. "We hold structured interviews to help bring depth and analysis to what each risk, which allows us to prioritize the risks that are most important to our company," he says.

To view video in its entirety, click here


Keywords:  supply chain risk management, supply chain, supply chain management, supply chain management scm, supply chain planning, supply chain solutions