Summary BEC-31806
Lecture 1: Monday 15 February, 10.30
Decision making = A way of facing opportunities, challenges and uncertainties of life
• Simple decisions;
o Complete insight in outcomes
o Simple decisions are the exception; not often that decisions are straightforward or
simple
• Hard decisions;
o Complex due to conflict and uncertainty
o No obvious, single solution
• Most people dislike to be confronted with hard decisions; often resulting in bad decision
making (by ignoring the hard decisions, resulting in bad decision making)
Subjective judgements about uncertainties and outcome-values are important inputs in
decision making processes.
Decision making
• A good decision does not guarantee a good outcome (good ≠ luck) (bad decisions can
result in good outcomes and vice versa!)
• A good decision is consistent with;
o DM’s believes about uncertainties and
o DM’s preferences for possible risky consequences
Risk and uncertainty
• Definitions vary in literature...... (see reader)
• Uncertainty imperfect knowledge (outcome can vary); value-free
• Risk uncertain consequences, particularly to unfavourable consequences; not value-
free
• To take a risk is to expose yourself to a significant chance of injury or loss
• Risky decisions;
o Possible loss =large
o Probability of suffering loss= high
o
Risks
• The general tendency is to perceive risks in negative terms
• BUT:
o ‘No risk, no gain’
o ‘Risk provides an incentive for development of new varieties’
o ‘It is the exception or real entrepreneur who looks for opportunities within risk’
• Risk management to avoid high losses and to maximize opportunities
(NOT about excluding risks! But managing those too high!)
Risk and developments in food production
• Development of agriculture as a response to the riskiness of relying on hunting and
gathering food
• Control over production processes to diminish risk; risk remains an inevitable feature of life
• Specialization and diversification resulted in a large number of links within food supply
chains making chains more vulnerable to risk
Sources of risk in food production
• Individual organization (5 categories)
o production risk (when to apply pesticides, what variety etc.)
o price or market risk (now seeding, later harvesting, price at the moment?)
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, o institutional risk (law/legislation in areas/markets, e.g. milk quota abandoned)
o human or personal risk (what if something happens to the key persons)
o financial risk (paying interest, flexible?)
• Supply chain risk;
o any event that affect the movement of materials from initial suppliers to final
costumers (affects ‘the flow’)(can arise from individual risk!)
o internal and external risks
Internal: under control of managers of supply chain
External: outside control of risk manager (floods, hurricane, wars)
Importance of risk management: Example of Ericsson / Nokia (mobile telephones)
In 2000, lightning hit power line Albuquerque, starting a small fire in Philips’ chip making factory,
which was put out in 10 minutes by the sprinkler system. Philips was at that time the sole chip
supplier of Ericsson as well as of Nokia.
- Ericssons production disruption took months; $400 million loss in sales due to fire 4000 miles
away
- Impact on Nokia impact was, however, small due to multiple supplier strategy and
responsiveness
A general approach to risk management
- Risk management to identify, analyse, assess, treat and monitor risk to
maximize opportunities
- So, to maximize opportunities, not to minimize risk
o After all, DMs are prepared to take some risks if they expect to earn some profit;
they try to avoid or diminish those risks judged too great to be borne
- Risk Management is a continuous and adaptive process; consisting of 7 cyclical steps
(see figure 1)
Figure 1 Cycle of 7 steps in Risk Management
7 steps:
Step 1. Establish context
- Who are the stakeholders of my business?
o Make a list of all stakeholders
- Who in the business is responsible for which risk?
o Financial Manager
o Quality Manager
o Marketing Director
o Etc.
Step 2. Identify important risky decision problems
- Which risks should be managed?
o Make a list of all possible risks; i.e. within food industry
Price changes, Changes in legislation, Food borne illness, Water
contamination, Power failure, Recalls, Fire, Accidents with workers, Liability
procedures, etc
Step 3. Structure Problem
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