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What Are the 4 Strategies for Risk Management?

By Avetta Marketing
September 22, 2021
3 minutes

Risk management is crucial to the success of any organization. Understanding the strategies for effective risk management can not only improve your supply chain and entire operations but can also protect your workers.  

When developing a strategy to manage risks, it is best to develop one that can fall into one or more of the following four categories: 

Risk Avoidance 

Risk avoidance gives companies the option to refrain from any activities that are likely to generate risks. Alternatively, you may think of another way to reach the same outcome that doesn't involve the same risks. This could involve changing your processes, equipment, or materials. 

An example would include avoiding working with a supplier in a foreign location because you are unfamiliar with their site or know there have been previous liabilities from their work environment.  

Risk Reduction 

Business can reduce risks like theft, injuries, or hacking in many ways.  

First, with prevention methods: 

  • Through quality control processes  

  • Auditing  

  • Compliance with legislation 

  • Staff safety training  

  • Regular maintenance or change in procedures—including running consistent security tests on computer software 

  • Installing securing systems   

Second, through procedures set in place if an incident does occur: 

  • Emergency procedures  

  • Off-site data backups  

  • Minimizing exposure to sources of risk 

  • Using a public relations firm 

Risk Transfer 

Risk transfer is defined as getting another party to accept the risk, like an insurer. The insurer takes responsibility for the risk and for restitution should losses occur. Risks can also be transferred through contracts, which often happens in construction where the builder assumes any risks associated with faulty jobs.  

Other forms of transferring risks include: 

  • Hedging strategies 

  • Futures contracts 

  • Derivatives 

Risk Retention 

Risk retention is a preferred approach to small risks where the cost of insurance would be greater over time than the total losses sustained.  

Risks that are not avoided or transferred are retained by default, including risks that are so catastrophic that they cannot be insured against or the premiums are prohibitive. War is an example of an uninsurable catastrophe since most risks are not insured. 

Across these risk management strategies one of the most beneficial tactics to use is to outsource functions, utilizing third-party suppliers. Companies who outsource choose skilled suppliers who demonstrate an ability to manage or reduce risks. 

Identifying alternative suppliers can help limit and manage risks, but only if done properly. Suppliers should be thoroughly vetted to ensure their certifications and experience back their knowledge of industry practices. Using suppliers who are not vetted and do not understand the industry and safety practices can be detrimental to your workers and your overall business.  

Each of the four risk management strategies come with their own advantages and disadvantages, and you may end up using not just one but all four. Companies can use risk management platforms to help them reach their goals as well. In some cases, it may be necessary to avoid a risk, and in others it may call for reducing it, transferring it, or even accepting it. 

To learn more about effective risk management for your business visit our website, call 844-633-3801, or email [email protected].

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