Understanding the environment in which a company operates is critical to the decision making process. Such environmental understanding requires recognizing the risks that are associated with current and planned activities, and what consequences those risks might carry for the company. Not all companies have a formal risk analysis process in place, and small companies in particular are likely to overlook the benefits that a formal process can bring. Once risks are identified, they can affect many different aspects of a company's operations, including the procurement effort. This research considers risk analysis and the effect of risk analysis on a risk management plan and procurement plan for organizations.
There are four types of risk that companies face: strategic, compliance, financial and operational. A new competitor or technology entering the market is a strategic risk. Compliance risks include health and safety regulations as well as other legal considerations. Depending on the industry, compliance risks can be significant business factors. Financial risks include not getting paid by customers, interest rate risks or decreased equity availability. Operational risks are associated with the loss of the use of equipment, such as might occur due to old equipment failing. Some risks affect more than one risk category, such as natural disasters, which can have operational and financial consequences (Segal, 2011).
Risk management begins with identifying the various risks that a company faces, the probability of those risks occurring, and the costs associated with those risks. Risks can then be accepted, transferred, reduced or eliminated. Deciding how to manage a particular risk depends on the cost associated with the various options, including accepting the risk, and the cost associated with the risk's consequences. Natural disaster
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