SUPPLY CHAIN RISK MANAGEMENT

Supply Chain Trends and Consequences

• The trend towards reducing costs: has resulted in the globalization of supply chains, making supply chains more vulnerable and complex.
• The trend towards outsourcing non-core business activities: has resulted in loss of control when it is most needed).
• The trend towards just-in-time and lean practices: has resulted in efficiency rather than effectiveness.
• The trend towards the consolidation of suppliers: has resulted in the increased potential for supplier failure

How to Define Risk

Risk is often defined as

RISK = f (Probability, Consequences).

Hence, risk is the combination of the probability of an event and its consequences/impacts.

Risk Management

Risk in the context of supply chains may be associated with the production/procurement processes, the transportation/shipment of the goods, and/or the demand markets.

Such supply chain risks are directly reflected in firms’ financial performances, and priced in the financial market. For example, it has been estimated that the average stock price reaction to supply-demand mismatch announcements was approximately -6.8%. In addition, supply chain disruptions can cause firms’ equity risks to increase by 13.50% on average after the disruption announcements.

Supply chain risk management is the intersection of supply chain management and risk management.

Constructs of Risk Management

Figure: The Basic Constructs of Supply Chain Risk Management

Source: Image taken from supply chain certification syllabus of AIMS institute of supply management)

Categorization of Risk

There have been different ways proposed of categorizing risk:

·         High-Impact Low-Likelihood (sometimes called Black Swan events)– Low-Impact High-Likelihood

·         Environment-Organization-Network

Risk Sources

Figure: Risk Sources in Supply Chains

Source: Image taken from diploma in supply chain management book of AIMS institute of supply management)

Environmental Risk Sources

Environmental risk sources consist of any uncertainties arising from the supply chain and environmental interactions. These may be the result of accidents (such as fires, explosions,

etc.), man-made (terrorist attacks), or natural disasters (earthquakes, tsunamis, and other extreme weather events).

Organizational Risk Sources

Organizational risk sources lie within the scope of the boundaries of the supply chain parties and include labor issues such as strikes, production uncertainties (quality and machine failures) to IT-based uncertainties.

Network-Related Risk Sources

Network-related risk sources arise from interactions between the organizations involved in the supply chain.

Network-Related Risk Sources

• Lack of ownership risk sources is due from the blurring of boundaries between buying and supplying companies in the chain. With outsourcing, there may be confused lines of responsibility.
• Chaos There may be chaos effects in a supply chain due to mistrust, overreaction, and distorted information.
• Inertia such risks are due to a lack of responsiveness to changing environmental conditions and market signals. Flexibility may be sacrificed, especially in global supply chains, where they may be an emphasis on cost reduction.

Adverse Risk Consequences

Risk may have adverse consequences that can be measured ex post through performance indicators. Ex ante they are captured in the variances of the indicator components.

Three of the most important adverse consequences are:

1. Financial consequences
2. Health and safety negative impacts
3. Reputation damage.

Mitigation Strategies

According to institute of supply management of supply chain management degree risk mitigation strategies are:

•  Avoidance (dropping specific products / geographical markets, etc.
• Control (through vertical integration, i increased stockpiling, maintaining excess capacity in production, storage, etc., and composing contractual obligations on suppliers)
• Cooperation (through joint efforts to improve SC visibility, the sharing of risk-related information, and preparation of SC continuity plans)
•  Flexibility (through postponement, multiple sourcing, localized sourcing)

(I wrote that notes or a blog when I was doing my supply chain management degree program I found them in my draw so I decided to share these notes for my students of supply chain certification and diploma in supply chain management)