The hazard totem pole analysis provides a method for the systematic evaluation of SC risks, integrating the risk evaluation aspects of their severity, probability and cost, as described above in Table II, Table III and Table V, respectively. The HTP diagram is designed to combine these three risk dimensions, which enables the determination of a singular ranking and the integrated depiction in a single figure. Codes and numerical values, as introduced above in Table II, Table III and Table V, are now integrated and used to represent different category levels.
Based on these three coding levels of severity, probability and cost, each risk factor is assigned a three‐letter code. For example a risk factor with a code of AJP (or 4, 4, 4) possesses a consequence severity of “catastrophic”, a probability of occurrence of “often”, and has an implementation cost to contain the identified risk factor of less than $1,000. The corresponding total HTP risk index is then determined as 12 (=4+4+4). Similarly, a risk factor with a code of BJQ (or 3, 4, 3), having a total risk index of 10, is associated with a “critical” consequence severity and a likelihood of occurrence of “often”, involving costs between $1,000 and $10,000 to implement risk reduction action plans. In this fashion respective risk codes and risk indices can be assigned to the identified SC risks. Risks with a higher index number, determined based on the risk's severity, probability and mitigation cost, should be first in line for management consideration.
With this input the HTP diagram can be constructed (Figure 3). First, all risks are ordered according to their total HTP index value from highest to lowest. Second, the corresponding three‐letter risk factor code is added to each line, to provide more information about the particular risk. And third, additional columns can be created that denote the cumulative risk factor count and the cumulative risk control cost. The pyramidal HTP diagram lists the most significant risks at the top (sharply pointed for immediate management attention), and the less significant risks at the bottom (Grose, 1987).
The risk factors at the top of the HTP represent catastrophic consequences that can be eliminated or contained for a small amount of money. As we go down the HTP, the impact of the ranked risk factors diminishes. Since no firm can afford to eliminate every identified risk, one can find a level in the HTP below which management accepts the risks, instead of implementing risk response action plans for their removal (similar to Figure 2 above, which is a pre‐version to the fully developed HTP here). Alternatively, a firm may have a certain budget amount available to implement mitigation strategies. Starting from the top, the firm could then decide to implement all risk mitigation plans until the cumulative risk control cost equals or exceeds the budget. This cumulative cost is the cumulative sum of the risk prevention costs, which are based on the values in Table V. With this approach, the most critical risks can be addressed, while at the same time being constrained by a limited amount of resources. As a result, risk response actions can be selected for implementation according to the priority and the available resources. The cumulative risk factor count at that point indicates how many risks (irrespective of their severity, probability and prevention cost) could be eliminated. The HTP analysis thus represents an effective decision tool for integrating the severity of the consequence, the probability of occurrence, and the implementation cost of a risk response action plan for an identified SC risk.
While the HTP analysis just described can serve as a useful decision aid, certain limitations must be noted which relate mostly to assumptions and the subjective nature of the rankings and evaluations. For example, the implementation costs for risk mitigation action plans are assumed to be fixed. However, after the resources have been expended, the risk may not be completely eliminated; its severity may be merely lowered, for instance from “catastrophic” to “severe.” Here, the budget estimated was not sufficient to completely eliminate the risk. The risk might also emerge in a modified form, for which the implementation action plan may be not as effective. The HTP analysis in Figure 3 can therefore only be a decision aid, and not a tool that makes decisions for the supply chain manager. It must be realized that almost all evaluations are subjective, and that assumptions made today may not be valid tomorrow any more. Modifications to Figure 3 may therefore be necessary. Nevertheless, considering these caveats, the suggested approach can help conceptualize and understand the problem in a more structured way