Course Content
Business 315: Logistics & Supply Chain Management
    About Lesson
    Making decisions with the most amount of certainty is something managers learn to do over time. In this lesson, we will review how managers work with certainty and risk in order to make informed decisions.

    What Is Certain

    Is there really anything in this world that’s certain besides death and taxes? Probably not. While I can believe some things will happen or occur with more certainty than others, if someone were to ask me ‘Are you 100% certain?’ I would have to tell them no. Managers, unfortunately, are in the same position. Equally unfortunate is when a boss is breathing down your neck for an answer and wants ‘certainty’ that the results will be what he or she is expecting. Welcome to the lovely world of managers and risk assessment.

    Weighing Risk

    When we talk about certainty, we are really talking about weighing risk: looking at the situation at hand, defining all the variables and issues that are present in that situation and weighing the risk against the uncertainty of the outcome.

    That is not an easy position for anyone to be in, but the more you are in it, and the more you go through it, the better you get at understanding it.

    For example, let us say that your boss comes to you and says ‘Jenkins, we need to build a new plant and we need it in the best place possible. Research the markets and make sure you put the plant in the right place.’

    Wow, Jenkins’ boss sure threw a tough one at him. Now, it is apparent Mr. Jenkins is going to have some uncertainty about exactly where this plant should go, and he obviously does not want to make a mistake. Certainty, risk and uncertainty are thus going to impact his decision-making process (along with the fact that his boss is breathing down his neck for the right decision).

    Several Perspectives

    Really, Mr. Jenkins can look at this from a few different perspectives:

    1. Is he making a decision based on complete uncertainty? Does he have no idea what he’s looking for or what to look out for?
    2. Is he making a decision based purely on weighing the risks involved? In other words, does he have a fairly good handle on the issue but is trying to understand all the risks that could occur?
    3. Is he certain he knows what to do and will go ahead and do it? In other words, is he trusting what he knows and not doing any research? This can be as risky as anything else, and we’ll talk about that in a little bit.

    If Mr. Jenkins is making this decision out of complete uncertainty, he does not have a lot of options but to do a lot of research.

    The trick is knowing what to research and where to look. He has to make sure he is reviewing the right criteria – for example, this might be city and state tax rates, roadways that can lead to the plant and how good or bad they are and the available employee pool in a specific location.

    Or maybe Mr. Jenkins is making a decision based purely on weighing the risks involved. To be honest, there is risk in every decision. Therefore Mr. Jenkins not only has to identify the risk but also understand the likelihood of that risk actually happening – and what he could do to address it if it did happen.

    For example, if he wanted to put the new plant in California, he’d have to consider earthquakes – how often do they occur and in what areas? While earthquakes are a definite risk, he would have to think about what the company could do about them if they did happen. To make decisions based on weighing risks, these are the kinds of issues that Mr. Jenkins will have to look at.

    The biggest mistake Mr. Jenkins can make is to have a sense of certainty and not look at any risk.

    He could be saying, ‘I know the best place to put the plant since I have done this a hundred times before.’ The fact is he would be making a decision purely on past experience and not on this particular issue. The word we’re looking for here is ‘arrogance.’ When managers make decisions from arrogance, they are almost certain to fail. All good managers make decisions that can be driven by experience and gut instincts, but they should be informed decisions with research that supports them.

    Do you really think Mr. Jenkins wants to make a decision from his own certainty, put the plant in a location, find out it was the wrong location and then be asked to come to his boss’ office to explain how he made the mistake? What do you think he could say?

    • ‘Well, boss, I was certain the plant would work there.’
    • ‘Sir, I have done this before in other places and it worked.’
    • ‘Boss, I was almost certain that was the right location.’

    All Mr. Jenkins’ boss has to say to each one of these replies is ‘How did you know that? What research did you do to make sure we avoided risk and raised our level of certainty?’

    I would think after that comment, Mr. Jenkins would be cleaning out his desk and starting to update his resume.

    Lesson Summary

    When any manager makes a decision, he or she has three ways to deal with risk:

    1. Uncertainty, or not knowing all that is involved or what the risks could be
    2. Weighing the risks involved, or looking at all the identifiable risks and gauging how much they will impact the situation and how likely they are to happen
    3. Making a decision from certainty and not looking at any risk, or trusting what we know and not doing any research

    Which one you choose will be based on how comfortable you are with the situation and the variables that are present. Just remember – a little research never hurt anyone.

    Learning Outcome

    After watching this lesson, you should be able to explain the options managers have for dealing with risk and give examples of each option.