CS Professional · Environmental, Social and Governance (ESG) - Principles and Practice · Risk Management
Sundaram Textiles Ltd. relies on a single supplier in Gujarat for dyes. The board notes that if the supplier's plant shuts, production would stop for weeks. The board decides to sign agreements with two additional suppliers in different states. Which risk response has the company adopted?
The company has adopted risk reduction through diversification. By engaging more suppliers in different states, it lowers its dependence on one source and limits the chance and impact of a supply stoppage, while still continuing the activity and retaining the residual risk.
- ARisk avoidance
- BRisk reduction through diversificationCorrect
- CRisk acceptance
- DComplete risk transfer through insurance
Explanation
Adding suppliers spreads dependence across several sources, which lowers the likelihood and impact of a supply stoppage. The company still carries the business and continues the activity, so it is not avoidance. No third party takes over the loss, so it is not transfer.
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