Chapter 2 - Risk Assessment and Classification

Q: A risk response will cost $30,000 for a risk of loss with a probability of 60% and an impact of $500,000. What is the expected monetary value of this risk after the response is factored in? A) -$318,000 B) -$330,000 C) -$366,000 D) -$530,000

A: A) -$318,000 Rationale: EMV = Probability x (Impact + Cost) = 0.6 x (-$500,000 + -$30,000) = -$318,000 For more information, see Module 3, Section B, Chapter 2, Topic 2

Q: The best case for a risk scenario is that a supply disruption will not occur and the subsidiary will spend US$100,000 in prevention costs for the period. The worst case is that a supply disruption will occur and will cost US$2 million in lost revenues and remediation costs. The worst case has a 20% probability. If these are the only two options being considered, what is the net expected monetary value (EMV) for this scenario? A) -US$480,000 B) -US$400,000 C) -US$320,000 D) -US$80,000

A: A) -US$480,000 Rationale: Since these are the only two options, the best-case probability is simply 100% - 20% = 80%. Best case EMV = 0.8 x -US$100,000 = -US$80,000. Worst case EMV = 0.2 x -US$2,000,000 = -US$400,000. Net EMV = -US$80,000 + -$US400,000 = -US$480,000. For more information, see Module 3, Section B, Chapter 2, Topic 2

Q: Which would be considered an external risk to the supply chain? A) Labor shortages B) Poor forecasting C) Poor quality D) Equipment breakdowns

A: A) Labor shortages Rationale: Labor shortages are considered an external risk to the supply chain. For more information, see Module 3, Section B, Chapter 2, Topic 1

Q: A proven method of estimating the amount of a risk budget to devote to a particular risk response is: A) multiplying the expected cost of the risk by its likelihood. B) adding accumulated risk associated with all strategic suppliers. C) subtracting the cost of the possible risk from the cost of business and dividing that by the likelihood of its occurrence. D) subtracting the cost of the possible risk from the cost of business.

A: A) multiplying the expected cost of the risk by its likelihood. Rationale: A best-cost analysis of risk is performed by multiplying the anticipated cost of the business disruption by the likelihood of its occurrence. For more information, see Module 3, Section B, Chapter 2, Topic 2

Q: An organization wants to estimate the cost of a machinery breakdown in its production line. It determines the most likely cost to be $12,500, with a low estimate of $4,500 and a high estimate of $18,000. If the organization uses the PERT weighted average to estimate the cost of the breakdown, what is the result? A) $11,667 B) $12,083 C) $12,500 D) $24,167

A: B) $12,083 Rationale: The formula for the PERT weighted average adds four times the most likely cost to the optimistic and pessimistic values and then divides this sum by 6. In this example, $12,500 x 4 = $50,000; $50,000 + $4,500 + $18,000 = $72,500; $72,500/6 = $12,083. For more information, see Module 3, Section B, Chapter 2, Topic 2

Q: A supply chain project could come in on budget, or it could be over budget by US$200,000. There is a 90% chance that it will come in on budget. What is the net expected monetary value (EMV) of this scenario's two options? A) -US$180,000 B) -US$20,000 C) -US$10,000 D) $US30,000

A: B) -US$20,000 Rationale: Since these are the only two options, the worst-case probability is simply 100% - 90% = 10%. Best case EMV = 0.9 x $US0 = $US0. Worst case EMV = 0.1 x -US$200,000 = -US$20,000. Net EMV = US$0 + -US$20,000 = -US$20,000. For more information, see Module 3, Section B, Chapter 2, Topic 2

Q: A process expert says that most likely, the cost per unit of a new product should be $12, but, in the worst case, it could be as much as $16. He says that if commodity prices stay low, unit costs could be as low as $9. If a PERT weighted average is used, what should the risk analysis use as the cost per unit? A) 12 B) 12.17 C) 12.33 D) 13

A: B) 12.17 Rationale: PERT Weighted Average = (Optimistic + [4 x Most Likely] + Pessimistic)/6 = ($9 + [4 x $12] + $16)/6 = $12.17 For more information, see Module 3, Section B, Chapter 2, Topic 2

Q: An organization wants to categorize risk at one of its factories. It identifies the likelihood of the risks as follows: Power outage: 80% Flood at facility: 5% Supply disruption: 70% Quality issues: 5% The potential impacts of these risks are rated as follows: Power outage: 5% Flood at facility: 95% Supply disruption: 70% Quality issues: 10% What are the resulting percentages for use in a probability and impact matrix? A) Power outage: 5%; flood at facility: 19%; supply disruption: 100%; quality issues: 2% B) Power outage: 4%; flood at facility: 5%; supply disruption: 49%; quality issues: 1% C) Power outage: 16%; flood at facility: 5%; supply disruption: 100%; quality issues: 50% D) Power outage: 6%; flood at facility: 5%; supply disruption: 70%; quality issues: 5%

A: B) Power outage: 4%; flood at facility: 5%; supply disruption: 49%; quality issues: 1% Rationale: Multiplying the impact and probability of each assessed item yields a useful probability and impact matrix that the organization can use to better focus risk preparedness efforts. The resulting figures are: Power outage: 4% Flood at facility: 5% Supply disruption: 49% Quality issues: 1% For more information, see Module 3, Section B, Chapter 2, Topic 1

Q: When an organization cross-references the impact of potential risk situations to the possibility of their occurring, what have they created? A) Risk blueprint B) Prioritization plan C) Risk rating D) Risk mitigation plan

A: C) Risk rating Rationale: Qualitative risk analysis is an analysis of the various qualities that make up each risk. The analysis can take into account many factors and thus can be nuanced while being cost-effective. The primary factors are probability and impact, but other factors such as urgency are accounted for. The various factors are weighed, and the result is a risk rating that can be used to rank the risks in order of importance. For more information, see Module 3, Section B, Chapter 2, Topic 1

Q: An organization is seeking to mitigate demand risks that occur in the form of inter-organizational communications. What is a potential root cause that it could address to mitigate risk in that area? A) Slow internet speeds at manufacturing locations B) Differences in opinion between suppliers and the organization C) Shared forecasts between partners D) Internal attitudes that forecasts are trade secrets

A: D) Internal attitudes that forecasts are trade secrets Rationale: One of the root causes of risk associated with inter-organizational communications is the attitude that forecasts are trade secrets. Keeping separate forecasts at different levels of the supply chain can result in the bullwhip effect. For more information, see Module 3, Section B, Chapter 2, Topic 1

Q: What is an internal risk to the supply chain? A) Transportation delays due to weather B) Political instability C) Customs risks D) Poor labor relations

A: D) Poor labor relations Rationale: Poor labor relations, work slowdowns, and strikes are examples of internal risks to the supply chain. Customs risks, transportation delays due to weather, and political instability are examples of external risks to the supply chain. For more information, see Module 3, Section B, Chapter 2, Topic 1

Q: An organization wants to understand what supply risks pose a threat to its manufacturing process. It performs an audit of its suppliers and discovers that one of them is running low on raw materials. What type of risk would this cause to the organization's manufacturing process? A) Supplier pricing B) Customs/import delays C) Supplier quality D) Supplier lead time

A: D) Supplier lead time Rationale: If a supplier doesn't have enough raw materials, this may signify a risk that it will be unable to deliver the requested quantities on schedule, which is associated with supplier lead time. For more information, see Module 3, Section B, Chapter 2, Topic 1

Q: If a fleet of delivery trucks is experiencing relatively poor maintenance, this is a red flag for what type of supply risk? A) Poor payables processing B) Subcontractor availability C) Labor disruption D) Transportation lead time

A: D) Transportation lead time Rationale: Transportation lead time risk can occur when the fleet has a high risk of breakdowns, such as when the fleet has been poorly maintained. For more information, see Module 3, Section B, Chapter 2, Topic 1