The options provided relate to different strategies for managing risk. In a typical risk management matrix, responses are categorized as Avoid, Mitigate (Reduce), Transfer, or Accept. "Insurance" is the most direct and classic example of a Risk Transfer strategy. This approach is used for risks with a low probability but a high potential impact. An organization pays a premium to a third party (an insurer) to shift the financial burden of a potential loss, thereby transferring the risk. While other options can involve risk transfer, insurance is the purest form of this strategy.

A. new technology: This is typically a source of operational change or a tool for risk mitigation, not a fundamental risk response category itself.

B. forward contract: This is a specific financial tool used to transfer price volatility risk, making it a subset of the broader 'Transfer' strategy, not the category itself.

C. outsource: This transfers operational risk to a supplier, but the buying organisation often retains significant reputational and strategic risks. It is a method, but insurance is the archetypal example.

1. Waters

D. (2011). Supply Chain Risk Management: Vulnerability and Resilience in Logistics. Kogan Page. In Chapter 6

"Responding to Risk

" Waters outlines the main responses

including risk transfer or sharing

stating

"The most common way of transferring risk is through insurance" (p. 118).

2. Slack

N.

Brandon-Jones

A.

& Johnston

R. (2013). Operations Management. 7th ed. Pearson. Chapter 18

"Operations improvement

" discusses risk management matrices and notes that for low-probability/high-consequence risks

a 'risk transfer' strategy

such as taking out insurance

is appropriate (pp. 578-579).

3. Christopher

M. (2016). Logistics & Supply Chain Management. 5th ed. Pearson. In the context of managing supply chain risk

Christopher discusses resilience strategies. Risk transfer through mechanisms like insurance is identified as a key method for mitigating the financial impact of disruptions (Chapter 10).

The arrangement is not right because it exposes Petra Ltd to an unacceptable level of risk. For a product defined by a critical attribute like "gluten-free," where failure can cause significant harm to consumers and the brand, relying solely on a supplier's pre-shipment tests is insufficient. The clause "deemed accepted by the buyer" upon delivery effectively waives Petra's right to perform its own verification. Best practice in quality management and supply chain risk mitigation dictates that the buyer must retain the ability to conduct goods-in inspection and testing for critical materials. This ensures a final quality check before materials enter the production process, protecting Petra from potential supplier errors or transit-related issues.

A: This is incorrect because while supplier testing reduces some risk, the "deemed accepted" clause removes Petra's own crucial control point, thereby increasing the overall risk of failure.

B: This is incorrect as the "deemed accepted" clause effectively transfers the risk of non-conforming materials from the supplier to Petra the moment the delivery is made.

D: This is an overly drastic and premature action. The core supplier relationship may be sound; the unacceptable clause should be renegotiated rather than voiding the entire contract.

1. Lysons

K.

& Farrington

B. (2020). Procurement and Supply Chain Management (10th ed.). Pearson. Chapter 11

'Quality Management

' discusses the importance of inspection and testing of incoming goods as a fundamental part of the buyer's quality control process. It states that "inspection is concerned with checking materials

products or services to see if they conform with the specification" (p. 298)

a step which Petra would be forgoing.

2. Baily

P.

Farmer

D.

Crocker

B.

Jessop

D.

& Jones

D. (2015). Procurement

Principles & Management (11th ed.). Pearson. Chapter 10

'Quality

and Supplier Evaluation and Performance

' emphasizes the buyer's responsibility for ensuring conformance. It details methods like acceptance sampling and 100 per cent inspection at goods-in

highlighting that verification by the buyer is a standard and necessary procedure for managing quality risk (pp. 205-207).

3. CIPS (Chartered Institute of Procurement & Supply). (2018). Managing Supply Chain Risk (L5M2) Study Guide. Profex Publishing. The guide emphasizes that robust risk mitigation strategies include implementing controls at various points in the supply chain. Relying solely on a supplier's assurance without verification is contrary to the principles of proactive risk management

especially for critical supplies that directly impact consumer safety and product integrity (Section 2.3: The role of quality management in managing supply chain risk).

The question asks to identify the type of risk that belongs in Box 2 of the likelihood/impact matrix, which represents risks with both High Likelihood and High Impact. This quadrant contains the most critical risks that an organisation faces, often considered intolerable and requiring immediate avoidance or reduction strategies.

Among the given options, 'hazard' is the most appropriate fit. In risk management, particularly from a health, safety, and environmental perspective, a hazard that has a high likelihood of occurring and would result in a high-impact consequence (e.g., fatality, major environmental damage) is deemed an intolerable risk. The primary strategy for such risks is avoidance—ceasing the activity or fundamentally re-engineering the process to eliminate the hazard.

B. financial: Financial risks (e.g., currency fluctuations, credit default) vary in likelihood and impact and are typically managed through hedging or diversification, not always complete avoidance.

C. strategic: Strategic risks are often taken intentionally to achieve objectives (e.g., entering a new market). They are managed and monitored, not necessarily classified as hazards to be avoided.

D. operational: While some operational risks can be high/high (e.g., critical supplier failure), many are inherent to business-as-usual and are managed through controls and contingency plans to an acceptable level.

1. ISO 31000:2018

Risk management — Guidelines. This international standard outlines the risk management process. In section 6.5.2 'Selection of risk treatment options

' it is established that 'avoiding the risk by deciding not to start or continue with the activity that gives rise to the risk' is a primary option

which is most applicable to risks assessed as having extremely high likelihood and impact.

2. Health and Safety Executive (HSE). (2001). Reducing risks

protecting people (R2P2). London: HSE Books. This official UK government publication discusses the concept of tolerability of risk. It explicitly defines a region of risk that is "intolerable" and cannot be justified in any ordinary circumstances (p. 10

para 39). High-likelihood

high-consequence hazards fall squarely into this intolerable region

reinforcing the choice.

3. Hopkin

P. (2018). Fundamentals of Risk Management: Understanding

Evaluating and Implementing Effective Risk Management. 5th ed. Kogan Page. This text

aligned with CIPS curriculum principles

describes the top-right quadrant of the risk matrix as containing risks that "will require immediate action" and where the response may be to "terminate the activity" (i.e.

avoidance). This aligns best with the concept of an intolerable hazard.

Sourcing from low-cost countries (LCCS) introduces specific and heightened risks due to differing regulatory, social, and political environments. Reputational risks are significant, as organisations can be associated with unethical practices in their supply chain, such as poor labour standards or environmental damage, which can severely harm their brand image. Geopolitical risks are also a primary concern, stemming from potential political instability, changes in trade policy, tariffs, or unforeseen government interventions in the source country. These factors can lead to severe supply chain disruptions and are characteristic challenges of operating in many low-cost sourcing destinations.

A. operational risks: While operational risks like longer lead times and quality control exist, they are a general feature of any extended supply chain, not a risk uniquely pronounced by LCCS compared to reputational and geopolitical threats.

D. financial risks: The primary driver for LCCS is financial gain (cost reduction). While risks like currency fluctuation exist, they are inherent to all international trade, and the most defining risks of LCCS are non-financial.

1. CIPS Official Course Book

L5M2 - Managing Supply Chain Risk. The syllabus and official texts for this module extensively cover the unique risks of global sourcing. The PESTLE (Political

Economic

Social

Technological

Legal

Environmental) analysis framework is often used to categorise these external risks. 'Political' factors directly correspond to geopolitical risk

while 'Social' and 'Environmental' factors are primary drivers of reputational risk

especially concerning Corporate Social Responsibility (CSR) failures in LCCS. (Note: Specific page numbers vary by edition

but this is a core concept in the global sourcing and risk categorisation chapters).

2. Christopher

M. (2016). Logistics & Supply Chain Management (5th ed.). Pearson. Chapter 8

"Managing Risk in the Supply Chain

" discusses how global sourcing extends supply chains and exposes them to higher levels of risk

specifically highlighting political and social volatility as key concerns that can lead to reputational damage and disruption.

3. Manners-Bell

J. (2017). Supply Chain Risk Management: Understanding Emerging Threats to Global Supply Chains (2nd ed.). Kogan Page. The book details various categories of supply chain risk

with dedicated analysis of geopolitical threats (e.g.

trade policy

instability) and reputational risks arising from CSR and ethical sourcing failures

particularly in the context of sourcing from developing economies. (See Chapter 3: 'Geopolitical threats to supply chains' and Chapter 6: 'Corporate social responsibility').

The question likely refers to a risk categorisation model used in supply chain management. In this context, risks are often grouped into major categories. 'Environmental' risk is a primary category of external, or macro-environmental, risk that can impact the supply chain. This category is analysed using frameworks like PESTLE (Political, Economic, Social, Technological, Legal, Environmental). It encompasses factors such as climate change, natural disasters, pollution, and sustainability regulations, which are beyond the direct control of the organisation but have significant potential impact.

A. strategic: This is a category of internal risk, relating to an organisation's long-term objectives, business decisions, and overall management direction.

B. intellectual property: This is a specific sub-type of risk, often classified under operational or legal risk, not a broad, top-level category like 'environmental'.

D. operational: This is a major category of internal risk that arises from failures in an organisation's day-to-day processes, systems, people, or procedures.

1. CIPS (Chartered Institute of Procurement & Supply). (2019). Managing Supply Chain Risk (L5M2). CIPS Official Course Book. Profex Publishing. In Chapter 2

"Understand and analyse the types of risk that can impact supply chains

" the text distinguishes between internal risks (e.g.

operational

strategic) and external risks

for which the PESTLE framework is a primary analytical tool. The 'Environmental' factor is a key component of this external analysis.

2. Waters

D. (2011). Supply Chain Risk Management: Vulnerability and Resilience in Logistics. Kogan Page. Chapter 4

"Identifying Risks

" categorises risks into sources

including 'environmental risks' (arising from the organisation's external environment) and 'organisational risks' (arising from within the organisation

such as operational and strategic risks).

3. Christopher

M. (2016). Logistics & Supply Chain Management (5th ed.). Pearson. Chapter 8

"Managing Risk in the Supply Chain

" discusses sources of risk

identifying environmental uncertainty (macro-level factors like political or economic shifts) as a major external driver of risk

distinct from internal process or control risks.

The risk management process follows a structured, sequential methodology. Risk analysis is a foundational stage within the broader risk assessment process. It involves developing a detailed understanding of the risk by determining its sources, consequences, and the likelihood of those consequences. The outputs of this analysis (e.g., the level of risk) are then used in the subsequent stage, risk evaluation, to make decisions about the significance of the risk and whether it requires treatment. Therefore, among the options provided, risk analysis must be performed before a risk can be evaluated, treated, or monitored effectively.

A. evaluate risk: This stage follows risk analysis. It uses the information from the analysis to compare against risk criteria and determine the risk's significance.

B. treat risk: This is the implementation stage that occurs only after a risk has been analysed and evaluated as unacceptable or requiring mitigation.

C. monitor risk: This is an ongoing activity that reviews the effectiveness of risk treatments and tracks changes, occurring after the initial assessment and treatment stages.

1. International Organization for Standardization (ISO). (2018). ISO 31000:2018 Risk management — Guidelines.

Clause 6.4

"Risk assessment

" explicitly defines the sub-processes in order: "Risk assessment is the overall process of risk identification

risk analysis and risk evaluation." This places risk analysis (6.4.3) before risk evaluation (6.4.4).

Clause 6.5

"Risk treatment

" and Clause 6.6

"Monitoring and review

" are presented as subsequent stages that follow the completion of the risk assessment.

2. CIPS. (2018). L5M2 Managing Supply Chain Risk: Course Book. Profex Publishing Limited.

Chapter 3

"The risk management process

" outlines the sequence as: 1. Risk Identification

2. Risk Analysis

3. Risk Evaluation

4. Risk Treatment. This official CIPS text confirms that analysis precedes evaluation and treatment.

3. Waters

D. (2011). Supply Chain Risk Management: Vulnerability and Resilience in Logistics. Kogan Page Publishers.

Chapter 4

"Risk Management

" pp. 59-61

describes the risk management cycle. The process is illustrated as a flow where 'Analyse Risks' is the step immediately following 'Identify Risks' and preceding 'Evaluate Risks' and 'Treat Risks'.

The Companies (Miscellaneous Reporting) Regulations 2018 introduced several new reporting requirements to enhance corporate governance transparency in the UK. A key provision, amending the Companies Act 2006, mandates that UK-registered companies with more than 250 employees must include a specific statement in their annual Directors' Report. This statement must describe the actions taken to engage with employees, how the directors have considered employee interests, and the effect of this consideration on the principal decisions made by the company during the financial year. This requirement aims to ensure that the employee voice is considered at the board level.

A. Publish an Anti-Slavery Policy: This is a requirement under the Modern Slavery Act 2015 for organisations with a turnover of £36 million or more, not the 2018 Miscellaneous Reporting Regulations.

B. Provide an annual financial statement: This is a fundamental and long-standing requirement for most companies under the Companies Act 2006, not a new provision specific to the 2018 regulations.

C. Demonstrate how they abide by Environmental practices: While these regulations did introduce Streamlined Energy and Carbon Reporting (SECR), option D is a more direct and specific corporate governance requirement introduced for this employee threshold.

1. The Companies (Miscellaneous Reporting) Regulations 2018

SI 2018/860. Part 4

Regulation 10 amends the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 to insert a new requirement (Schedule 7

paragraph 11) for a statement on employee engagement. Available at: https://www.legislation.gov.uk/uksi/2018/860/regulation/10/made

2. Explanatory Memorandum to The Companies (Miscellaneous Reporting) Regulations 2018. Section 7.4 explicitly states: "This instrument also introduces a new requirement for companies with more than 250 UK employees to include a statement in the directors’ report summarising how the directors have engaged with employees and how they have had regard to employee interests." Available at: https://www.legislation.gov.uk/uksi/2018/860/memorandum/contents

3. Financial Reporting Council (FRC). (2018). Guidance on the Strategic Report. This guidance was updated to reflect the 2018 regulations and provides context on the new reporting requirements

including the Section 172 statement and specific employee engagement disclosures (Paragraphs 7.30-7.33). Available via the FRC website.

The 'Treat' risk control strategy, also known as risk mitigation or reduction, involves implementing specific actions and controls to reduce the likelihood of a risk occurring or to minimise its potential impact on the organisation. The question's description of developing actions to "minimise the impact" is the core definition of treating a risk. This proactive approach aims to lessen the severity of the consequences should the risk event materialise, aligning perfectly with the 'Treat' response.

A. tolerate: This strategy involves accepting the risk and its potential consequences without taking any action. It is a passive approach, contrary to the active development of actions described.

C. transfer: This involves shifting the financial consequences of a risk to a third party, such as through insurance, but it does not minimise the operational impact of the event itself.

D. terminate: This strategy, also known as risk avoidance, involves eliminating the risk entirely by ceasing the activity that generates it, rather than managing its potential impact.

1. CIPS (2018). Managing Supply Chain Risk (L5M2). Stamford

UK: Chartered Institute of Procurement & Supply. Chapter 4: Risk Mitigation and Management

Section on 'The 4Ts model'

pp. 89-91. (This section explicitly defines 'Treat' as taking action to reduce the probability and/or impact of a risk).

2. ISO 31000:2018. Risk management — Guidelines. International Organization for Standardization. Section 6.5.2

"Selection of risk treatment options

" describes options for modifying the risk

which aligns with the 'Treat' concept of implementing controls to change the consequences (impact).

3. Waters

D. (2011). Supply Chain Risk Management: Vulnerability and Resilience in Logistics. London: Kogan Page. Chapter 7

"Responding to risk

" details risk reduction (treatment) as actions taken to lower the probability or consequences of adverse events.

The scenario describes a drop in share price and high levels of Work-in-Progress (WIP). A drop in share price is a direct manifestation of financial risk, as it impacts the company's market valuation and shareholder wealth. High WIP also represents a significant financial risk because it ties up working capital, increases holding costs, and can lead to obsolescence, negatively affecting cash flow and profitability. While the trigger is a logistical failure (late deliveries), the resulting consequences described for the business are primarily financial in nature.

B. logistical: This is the source or cause of the problem (late supplier deliveries), not the resulting risk category that includes a drop in share price and capital being tied up.

C. opportunity: This risk relates to the potential loss from forgoing an alternative course of action, which is not the direct problem described in the scenario.

D. reputation: While ongoing supply issues can eventually harm a company's reputation, the question highlights immediate and quantifiable financial impacts, making 'financial' the most precise answer.

1. CIPS (Chartered Institute of Procurement & Supply). (2018). Managing Supply Chain Risk (L5M2). Stamford

UK: Profex Publishing. In the section on 'Categories of Risk

' financial risks are defined as those pertaining to the financial health and viability of the organisation. This includes risks to profitability

cash flow

and shareholder value (which is directly impacted by share price). High WIP is a working capital issue

which falls under financial risk management. (Specific chapter on risk categorisation).

2. Waters

D. (2011). Supply Chain Risk Management: Vulnerability and Resilience in Logistics. London: Kogan Page. Chapter 2

"Types of Risk

" categorises risks and explains how operational disruptions (like late deliveries) translate directly into financial risks

such as increased costs (from holding WIP) and reduced revenue

ultimately affecting company valuation.

3. Chopra

S.

& Sodhi

M. S. (2004). Managing Risk to Avoid Supply-Chain Breakdown. MIT Sloan Management Review

46(1)

53-61. This article discusses how supply chain disruptions (a form of logistical risk) create significant financial consequences for a firm

including impacts on stock price and increased working capital requirements

reinforcing the link between the logistical cause and the financial effect.

Logistics risks are those associated with the movement and storage of goods through the supply chain. Extended supply chains, by definition, span greater geographical distances, cross more borders, and involve a higher number of handling points and transportation modes. This inherent complexity and length directly increase the exposure to potential disruptions. Key logistical risks such as transportation delays, damage to goods during transit, customs clearance issues, and loss of inventory are all magnified as the supply chain becomes longer and more fragmented. Therefore, the extension of supply chains is a fundamental and direct cause of increased logistics risk.

A. heightened ethical standards: This is a driver of compliance and reputational risk, influencing sourcing decisions rather than directly causing a physical disruption in the flow of goods.

B. customer expectations: High expectations (e.g., for faster delivery) can increase the pressure on logistics operations and amplify the impact of a failure, but they do not cause the failure itself.

D. economic instability: This is a broad, macro-environmental risk that affects the entire supply chain (e.g., currency, supplier viability), not a specific structural cause of logistics risk like distance.

1. Christopher

M. (2016). Logistics & Supply Chain Management. 5th ed. Pearson. In Chapter 8

"Managing Risk in the Supply Chain

" Christopher explicitly links the trend towards global sourcing with the creation of "long and thin" or extended supply chains

which are inherently more vulnerable to disruption due to longer lead times and reduced visibility (pp. 210-212).

2. Waters

D. (2011). Supply Chain Risk Management: Vulnerability and Resilience in Logistics. 2nd ed. Kogan Page. Chapter 3

"Sources of Risk

" identifies risks within the supply chain

noting that complexity is a major driver. Extended supply chains are a prime example of increased complexity

leading to higher chances of transport delays

infrastructure failures

and other logistical problems (pp. 45-48).

3. Chopra

S.

& Sodhi

M. S. (2004). Managing Risk to Avoid Supply-Chain Breakdown. MIT Sloan Management Review

46(1)

53-61. The article identifies globalization as a major factor increasing supply chain risk. Globalization leads to extended supply chains

which are more susceptible to disruptions from a variety of sources

including natural disasters

geopolitical instability

and transportation failures (p. 54).