You might assume, and rightly so, that adding safety features to something would result in a clear outcome: fewer accidents. 

However, due to the nature of risk management, the outcome in this situation (and any other when trying to mitigate risk) could actually end up increasing risk. 


For example, there is the case of what happened when a portion of taxicabs in Munich were newly equipped with much safer anti-lock brake systems (ABS). The anticipated outcome was that the ABS taxis would have fewer accidents. But the actual outcome was no change in the rate of accidents for the ABS taxis versus the non-ABS taxis. Although the city of Munich tried to manage risk, the result was not what they intended.


A detailed study discovered that the taxi drivers who had the ABS had become inferior drivers, because their brakes were better. They braked harder, they tailgated, and they merged more aggressively. Accidents were not reduced by the use of ABS, but rather allowed the drivers to drive faster and more recklessly without increasing their rates of accident. 


The result of risk management in the case of the taxicabs in Munich is an illustration of the concept of risk homeostasis. At the most basic level, the phrase risk homeostasis is the idea that changes made to reduce risk may actually increase risk. In essence, risk management can itself be a risk.


Risk homeostasis can also work to decrease risk when an increase in risk was anticipated. As an example, in the late 1960s, Sweden changed over from driving on the left-hand side of the road to driving on the right. As you might think, it was projected that this switch would increase risk and create a higher rate of accidents. But, the opposite proved true. Drivers compensated for the increased risk by driving more carefully. Accidents dropped the year after the switch, before eventually returning to their prior levels.


Due to my interest in supply chain consulting, I began wondering how to apply the concept of risk homeostasis to supply chain risk – which I view at its highest level as dealing with supply risk and demand risk. 


Supply Risk:

As an example of supply risk, I have seen a procurement-oriented approach that focused on contract conformance and supplier performance, and along with the core supplier concept, resulted in consolidation of suppliers. But this, due to the financial viability of the supplier, resulted in greater risk, not less. 


Risk homeostasis teaches us to consolidate, but not to go too far, or risk reduction may beget an increase in risk. 


Demand Risk: 

Working to increase forecast accuracy is typically seen as a good tool to reduce demand risk. But what happens in situations like now, when we come out of recession, is that the historical basis of the forecast is no longer valid. (For more on the uselessness of forecasts during this recession, see my earlier post, “The Forecast: Cloudy with a 100 Percent Chance of More Useless Forecasts.”)


Since we have reduced forecast error during the recession, we falsely believe we do not need to check the forecast as we come out of the recession. 


We then wind up with unanticipated levels of supply and demand in the market. For example, there is a huge global shortage of electronic components that presently exists because of forecast error, which means companies in these industries aren’t able to fill orders.


Risk homeostasis is at work here, as we reduced risk by reducing forecast error, but this false sense of confidence when the market shifted actually resulted in higher risk.


All of this boils down to something many of us learned a long time ago, even before we learned the phrase risk homeostasis. Addressing risk in one aspect of the supply chain may very well increase risk elsewhere in the supply chain. When attempting to manage risk, always use your experience and judgment to evaluate not only the positive consequences, but also the negative. 



More Resources 

Article - Inventory Management: Proper Planning Can Lead to Big Improvements

Article - Top 40 Risks in Outsourcing 

Article - Flexible, Adaptable, Redundant and Secure: Strategies for a Resilient Supply Chain 

Global Supply Chain Services and Risk Management

Supply Chain Best Practices

Photo Credit: Peyman