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All supply chains are vulnerable to risks, but solutions to those risks are not one-size-fits-all. Sometimes, a company might choose to prioritize growth objectives alongside threat prevention. Other times, budget constraints might require that they only invest in risk mitigation must-haves. Whatever the case, it’s important to understand your specific risk appetite, risk tolerance, and risk capacity levels in order to effectively fend off threats.
Here’s an overview of how those three concepts differ and why understanding them is central to achieving your goals.
The difference between risk appetite, risk tolerance, and risk capacity
At first glance, it can be difficult to tell the difference between risk appetite, risk tolerance, and risk capacity. In fact, definitions can range widely across the industry. For this reason, Overhaul differentiates these terms in the following way:
Risk appetite concerns how much risk a company is willing to take on in pursuit of its goals. Essentially, it requires companies to weigh the risks of an action versus its potential rewards. A company with a high risk appetite will be more open to risks, such as transporting high-value shipments. However, a company with a low risk appetite might focus on more stable, less risky opportunities.
Risk tolerance builds off of risk appetite to determine the absolute maximum level of operational risk a company can wisely take. This level highlights the amount of risk a company might endure before facing substantial–but not unendurable–losses or operational difficulties. In that sense, whereas risk appetite focuses more on potential rewards, risk tolerance is concerned with the extent of risk a company can effectively manage.
In comparison to risk appetite and tolerance, risk capacity is a more objective number that concerns a company’s finances. It questions whether a company could financially recover in the event of a risk event. For this reason, a company’s total assumed risk should never exceed its risk capacity.
It’s important to note that financial health should not be a company’s only consideration, as successful thefts can still mean delays or reputational damage. Additionally, at a certain point, a company will experience one threat too many and be unable to recover.
In summary, the concepts above can be a bit nebulous and hard to pin down. However, at Overhaul, we consider several delineating factors when it comes to risk capacity vs risk tolerance vs risk appetite.
Risk appetite is the amount of acceptable risk a company is willing to take on in order to pursue a goal. After considering their other needs, tolerance is the highest amount of risk they can manage based on comfort levels and ease of operations. Following that, capacity is the amount of risk, at worst, that they can financially recover from.
By understanding these three terms, a company can better decide whether or not the risks involved with a decision are worthwhile.
Examples of risk appetite vs risk tolerance vs risk capacity
Low risk appetite, low risk tolerance, high risk capacity
A large, well-established retail shipper will likely have a high risk capacity. If given the opportunity to expand their operations abroad, they could financially recover from a stolen or lost shipment. However, they might have a low risk appetite and not be interested in expanding their operations at present. Additionally, they might have a low risk tolerance and worry that said expansion could threaten their current operations.
High risk appetite, low risk tolerance, low risk capacity
An up-and-coming LSP with a high risk appetite will be interested in taking on more clients. However, the more clients they work with, the more risks they take on. In this case, the LSP has a low risk capacity and high risk appetite. They also have a low risk tolerance, as they do not have the manpower or time to commit to new customers.
Medium risk appetite, high risk tolerance, medium risk capacity
A pharmaceutical LSP might want to use new modes for shipments in order to more quickly and effectively transport goods. However, because they have a medium risk capacity, they’ll want to keep track of financial threats. At the same time, their high risk tolerance level suggests that incorporating these new modes will likely not impact operations. Because they have a medium risk appetite, it’s possible they’ll forego this opportunity until they’re in a better financial position, even though it would likely be operationally sound.
Other risk considerations
Risk of any kind must be taken seriously. However, while a company should strive to mitigate all risks, they must do so while also balancing their budget and goals. This is why some companies might invest in every risk management tool while others will only use the essentials.
For these reasons, companies must consider which risks they’re willing and able to accept, as well as which threats they’re unable to manage alone. To help them make these decisions, companies should consider the following:
1. Unique supply chain vulnerabilities
From the products shipped to the routes taken, every company must consider the unique risks that accompany their cargo’s journey. For example, some companies ship infrequently targeted goods or operate in lower risk areas. As a result, they might decide that they only need basic risk protection tools. However, the opposite is also true: high-value shipments often require higher-tier support.
A company with a higher risk appetite will be less concerned with what they’re shipping and where than one with a low risk appetite. In turn, they might be willing to ship certain products that a company with a lower risk appetite will refuse. On the one hand, this could mean more opportunities for the former company. However, if they are unprepared to take on additional risks, these “opportunities” could quickly sour.
2. Future goals and timelines
A company’s risk levels should not be stagnant. As the company evolves, they will likely become more willing and able to take on new risks. Of course, this isn’t always the case, as indicated by the low risk appetite, high risk capacity company above. However, this lack of a risk appetite could ultimately hurt the company going forward.
A company that is never willing to take risks is a company that will never grow. At the same time, a company that will jump on any opportunity regardless of risks is setting itself up for failure. For this reason, shippers and LSPs must cultivate a culture of informed and prepared risk-taking. This will help them meet their long-term goals without straining their current capabilities.
3. Risk preparedness
In contrast to risk appetite, tolerance, and capacity, risk preparedness shows how ready a company is to avoid and respond to threats. In other words, it considers the tools and strategies that a company utilizes to navigate risk. Some of these tools might include visibility or risk monitoring solutions alongside insurance and compliance support.
Ideally, companies with low risk levels should have high levels of preparedness. This way, they’re ready against the majority of threats. On the other hand, a company with a high risk appetite, tolerance, or capacity might not be overly concerned with preparing. Instead, they’ll simply invest in the basics and assume the added risks.
Overhaul’s risk mitigation solutions
While certain companies have higher risk appetites or capacities than others, all companies are vulnerable to theft, damages, and delays. For this reason, every supply chain benefits from effective risk mitigation strategies.
Overhaul works with companies of various risk profiles to spot, stop, and prevent threats. For example, companies with higher risk capacities can work with Overhaul to track risk and improve compliance via their existing data. They can also layer in IoT tracking for better situational awareness and deeper contextual insights.
For companies with medium risk appetites or tolerances, we also offer risk monitoring via our Fusion Hub. Additionally, a second IoT device can be embedded for enhanced protection against theft.
Finally, companies that need the highest level of risk preparedness can take advantage of our full suite of solutions. Along with everything above, these companies can make use of our Intelligent Door Seal Solution to prevent and detect any signs of load tampering and stop theft in its tracks. Finally, they can access our LE Connect network for fast recoveries and our Insurtech offerings for insurance protection in worst case scenarios.
Whatever your organization’s risk profile, Overhaul can help you manage risk. At the same time, we don’t just help prevent cargo theft–we also support cold chain, logistics visibility, and more. Our tiered offerings ensure you have the solution that fits your needs. Through our holistic support, Overhaul is changing the game for supply chains.
Learn more about our risk prevention and mitigation offerings and contact us to discuss your unique needs.
