Fundamentals of Risk Management

Risk governance
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Joint ventures
Securing priority status from suppliers may be part of the arrangements for an
organization to secure its supply chain. However, for very critical components or 
support operations, priority status may be insufficient. Many organizations, there-
fore, explore the possibility of setting up joint ventures with their suppliers in order 
to ensure priority supply status.
Setting up joint ventures also allows the organization to have some management 
control over the operation of a supplier and eliminate the possibility that the sup-
plier will deliver goods to a competitor in difficult market conditions. Joint-venture 
arrangements may also be an appropriate way of responding to competitor activities 
by denying the competitor access to the products produced by the joint-venture
partner. Joint ventures may also be a successful way of responding to technology 
changes in the marketplace, because the organization will not need to find all of the 
funding required to embrace the new technology.
These sorts of competition and technology changes in the supply chain may be 
very significant. In fact, it may be beyond the resources of existing organizations 
operating in the marketplace to respond to these changes. Joint-venture operations 
can ensure continuity of supply chains and also, if correctly executed, deliver com-
petitive advantage. All of this can be achieved while putting less capital at risk.
An organization may have a strategic objective of reducing its dependency on
suppliers. Tactical options will be available, including taking over the supplier or 
setting up a new organization jointly with your supplier as a separate joint-venture 
organization. Setting up a joint-venture organization will put the organization into
a situation where more of the risks are under their direct control. Setting up such
a joint venture may be the appropriate tactical option, because it will require less 
capital and/or less resources to be allocated than would be the case if the supplier 
was purchased outright.
The advantage of joint ventures is that the risks are shared. These are usually 
shared by contractual agreements or by the establishment of a separate company 
with an agreed allocation of capital to fund that company. Because the capital is 
shared, the risks involved with the venture will be shared and, accordingly, the
benefits and rewards will be shared. Joint ventures are a mechanism whereby an 
organization can exploit benefits but with a lower risk exposure. This will be a
suitable way forward for organizations that do not have the appetite to fully fund 
the venture.