Risk and uncertainty Flashcards
What does risk refer to?
Risks is situations where outcomes are unknown but potential scenarios and probabilities can be estimated.
What does uncertainty refer to?
Uncertainty is situations where its impossible to predict possible outcomes/probabilities of these possible outcomes.
What can the impacts of risks and uncertainties be?
Unanticipated changes (in operating costs, output quantities, selling prices)
Stakeholders lacking confidence
Create a need to start contingency planning
Make a need for a buffer stock scheme
What is a buffer stock scheme?
A buffer stock scheme is set by representing extra inventory to accommodate for uncertainties in supply and demand.
What is contingency planning?
Contingency planning is when a business makes alternate plans in order to manage unpredictable events.
What can businesses do to manage risk?
Firstly businesses identify potential risks and analysing impacts the taking appropriate actions on said risk
Then decide what to do ie Avoid, accept or transfer risks
To transfer can use insurances or hedge contracts
What can business do to manage uncertainty
Scenario planning - can manage and prepare for uncertainties by developing strategies for various outcomes.
Current time information systems and predictive analytics - help provide businesses with data to react quickly to market changes.
Robust processing systems - will help to provide consistent results under various conditions.
Flexible business model - may use if they need to adapt to changing markets.
How can risk affect decision making?
When making decisions which face risk buisnesses may use expected values which they then combine with the probabilities of each of the outcomes.
How can uncertainty affect decision making?
When making decisioions under uncertainty buisness may choose best worst case scenarios or best case scenarios
