Question

You are the project manager of a software development company. Your company receives supplies of chips from a foreign supplier. Their sales manager has approached you to inform you that if you can increase your order by 30%, the shipment will be free for your organization. This however will bring additional cost of $100 on your current budget that is $5000 p.a. What type of Risk is this? Identify at least three things you can do in response given consideration to best practices?

Answer 1

Solution:

Risk is defined as a possibility of something adverse happening. It has an element of uncertainty that may result in an undesirable outcome. For example, a factory getting damaged by fire, political uncertainties leading to business closure, COVID-19 type pandemic, etc.

In the context of the given case, it is given that with a 30% additional order (which means at 130%), the order value would be $5100 which causes a budget variance of $100. This is an example of Budget Risk where a project's budget and/or estimate gets adversely impacted due to factors within or beyond control.

Strategies to mitigate the stated Budget Risk:

1. Perform a Return On Investment (ROI) analysis to see if the additional order quantity is required and if it will result in higher benefits - If no, then the order quantity does not need to be increased;
2. If the decision makes business sense, one should try to maintain the current budget by asking the supplier to give a discount worth $100;
3. Alternately, one should try to maintain the current budget by asking the supplier to give the free shipment for a slightly smaller order size (say 125%).