Every supply chain manager should test their Risk Intelligence

As a result of today’s economic turbulence, supply chain managers are having to make more and more decisions every day. The current economy presents many risks, but plenty of opportunities too. When sailing in a storm, good competitive sailors know how to turn the rough weather to their advantage and take the lead. In order to make the right decisions when a storm is gathering, it is essential to have some knowledge of risk management.

Fight or flight

Recent scientific studies provide new insights into how decisions are made in the face of risk. A tiny part of the brain, called the amygdala, is responsible for the ‘fight or flight’ decision. In addition to the brain’s chemicals and internal wiring, personal experiences also have an impact on decision-making. Even data-driven supply chain professionals may be misled by such subjective influences. As a way of dealing with complex situations and data, the human brain tends to simplify issues by categorising the input. In the case of complex risks, people have a tendency to place them in a particular category based on sector or location, for instance, despite the fact that this has little to do with the risk level. And if you are trying to estimate the probability of a future event, your brain will search for a comparable situation; if it is easy to recall an example of when it has happened in the past, you will class the event as ‘likely’. This is known as the ‘availability heuristic’.

Assessment of risks and opportunities

In 2012, British scientist Dylan Evans wrote an interesting book about risk intelligence – the ability to assess risks and opportunities, the awareness of how much of a risk one is actually taking. Perhaps surprisingly, scientific research has shown that there is no link whatsoever between the ability to estimate one’s chances of winning and one’s IQ. Evans has developed an online test (see www.projectionpoint.com) to measure risk intelligence based on the level of conviction about various statements. Some highly intelligent students of Evans admitted that they found the test more difficult than an IQ test; they lack the capacity for uncertainty.

I think it would be a good idea for supply chain managers, and most definitely supply and demand planners, to take this risk intelligence test together with sales managers. This would give companies much greater insight into how their employees assess risks and opportunities.

Martijn Lofvers, Publishing Director & Editor-in-Chief of Supply Chain Movement