Risk Management and Operational Hedging: An Overview

This chapter presents an introduction and overview of risk management and the techniques that operation managers can use to mitigate risks. It describes the concept of risk management and views it as an ongoing four-step process and integral part of operations strategy. The chapter outlines the various operational risks that companies are exposed to. It then reviews methodologies to assess and value those risks both qualitatively and quantitatively. The chapter also reviews tactical risk decisions, including risk discovery and risk recovery, and illustrates strategic risk mitigation. It describes four generic strategies to mitigate risk using operational instruments, and explains financial hedging of operational risk using options and derivatives. The chapter illustrates how operational hedging can be tailored to the specific operations strategy of the firm using techniques such as: tailored redundancy, dynamic pooling with allocation flexibility, chaining, and multisourcing. It summarizes some guidelines for operational risk management. Controlled Vocabulary Terms crisis management; operational risk; risk management