A supply chain is the link in which raw materials are obtained from the suppliers, delivered to the company for production, transferred to the distributors who transfer the product to retailers for final delivery to consumers for consumption (Gurnani, 2012). As it can be noted, the supply chain determines the company’s performance in the market therefore the management should carefully and critically study the whole supply chain. Risks that have had an impact on the supply chain include the terrorist attack on 11 September, the Haiti earthquake and the recent H1N1 that whole world (Waters, 2011). These events have made the role of supply chain risk management (SCRM) be more important than it was before. Apart from the natural disasters, there are also other factors that can disrupt the supply chain such as the in 2000 Sony Ericsson lost 400 million Euros after their supplier’s semiconductor caught fire while Apple lost a significant number of their customers after the DRAM chips became scarce after the Taiwan earthquake in 1999(Gurnani,2012).
The management therefore needs to examine the whole supply chain and identify the risks involved at each stage and be able to deduce the mitigating measures that can be put in place to reduce or eliminate the risks. This paper therefore starts by defining the term risk. A detailed analysis of the sources of risk is outlined as these are the building blocks of coming up with a solution of mitigation of the risks. Finally, the methods of mitigation of the risk are also analyzed.
Risk and Supply Chain Risk Management
Risk refers to the measure of probability of an unlikely event occurring (Waters, 2011). Therefore, this implies that risk should be an uncertain event whose occurrence has adverse effects on a given activity. Supply chain risk management is therefore the management of risks that are likely to occur along the supply chain to reduce the vulnerability of the risk and increase the profitability of a company (Waters, 2011). Supply chain risk management also ensures the continuity of the organization, as most risks tend to paralyze the operations of the firm (Gurnani, 2012).
Effective management of risks requires that any firm should set up an organ that deals with identifying risks, analyzing and come up with measures so as to mitigate the risks. This organ of the firm will advice the management appropriately on what ought to be done so as to avoid the firm from incurring huge losses that come up due to supply chain risks. The supply chain risk management should always focus on analyzing all the factors that can affect the whole chain from production to consumption. This requires that the management heavily invests on research. Even though research on supply chain risks is costly the benefits should be the driving force that should motivate the firm to deviate its resources in research work.
Classification of Supply Chain Risks
Supply chain risks can be classified in different ways such as; planned or unplanned risks. Planned risks occur from time to time, thus the management can manage and plan for them such as the breakdown of a machine is a common occurrence thus the management should work on means and ways on how to manage it when it occurs. Unplanned risks always happen unexpectedly, thus the management is not able to predict its occurrence such occurrence of natural disasters and terrorist attacks (Gurnani, 2012). Both the planned and unplanned risks cause disruptions in the supply chain .However, the unplanned risks have more severe effects than the planned risks.
However, general risks can be classified as either environmental or industrial factors. The environmental factors are all the conditions that surround the supply chain and the organization and the management barely has control over them. The environmental factors are further classified as political instability, natural calamities and social uncertainties (Waters, 2011). The political stability of the country has a direct impact on the performance of a firm as political uncertainties such as wars and revolutions have an impact on the supply chain (Free, 2009). Government policies such as tariffs, tax policies, regulations and employment laws also affect the supply chain. The reasons as to why firms like Wal-Mart and Hanes have not established in Bangladesh is due to the political unrest that is facing the country (Gurnani, 2012).
The social uncertainties revolve around social issues such as lifestyle issues, employment issues and education level. Fluctuating employment rates affect the human resource availability thus; affect the supply chain (Waters, 2011). Educational issues and unemployment level determine the outlook of society that can lead to terrorism, which will in turn affect the supply chain such as the terrorist attack on 11 September that led to delays of loading trucks in Canadian and Mexican borders (Gurnani, 2012). Natural uncertainties are the natural factors such as fires, earthquakes and flood (Gurnani, 2012). These natural occurrences cannot be prevented in any way. However, their vulnerability should be reduced. The loss of 400 million Euros by Ericsson due to the supplier’s plant catching fire is a good example of natural calamities.
Despite the management being concerned about risks that revolve around their supply chain, the management should also consider factors that are within their industry. These risks can be further be classified as product, input and competitive uncertainties (Waters, 2011). Input uncertainties are factors that are concerned about the quality of raw materials, technology availability, equipment and machine availability and reliability (Gurnani, 2012). The input uncertainties have many risks and may make a firm very vulnerable as these risks affect the quality and quantity of the firm’s product such as inconsistency in the product quality affects the supply chain down to the final consumer. Example is when Toyota closed down 18 of its plants for a period of 2 weeks simply because a brake-fluid was faulty (Free, 2009).
Product market uncertainties are concerned with changes in customer demands, which are also influenced by the social uncertainties such as the lifestyles of customers, affects choices of food and transportation. The impact can also be felt on consumer’s disposable income, which will therefore affect the choice of products (Gurnani, 2012). Moreover the competitive uncertainties are concerned with the competitive rivalry amongst firms such as new innovations by firm may pose a threat to other firms in the industry thus affect the supply chain of such firms.
Supply Chain Risk Evaluation
Identification and recognition of the risks is not enough but the management needs to evaluate each risk. Risk evaluation and assessment is done by calculating the probability of a given unlikely event-taking place. This can be done empirically, subjectively or theoretically (Gurnani, 2012). Most often, management uses the empirical method in which data is collected regarding each risks and a simulation model is derived to evaluate the probability of each risk and the degree of vulnerability (Waters, 2011).
Risk evaluation can also be achieved by being subjective; however, the management should avoid being biased. The management arrays the various risks that it faces and by perceptions, it is able to determine the degree of vulnerability of the risks. This criterion is rarely used as it suffers from biases and it has no basis of rating the risks (Waters, 2011). Finally, management can also rely on the theoretical aspects of companies that exist in the same industry. The management evaluates the risks from scholarly articles written about the risks or rather what has been documented about such risks that have occurred to other players in the same industry. Through this the management will be able to evaluate each risk.risk evaluation is therefore an important aspect in supply risk management as it will enable the firm identify the risks that they need to heavily invest as they insure the rest or avoid the risk completely (Gurnani, 2012).
Mitigation of Supply Chain Risks
This refers to the ways or methods that the management can take to reduce the impact of risk (Free, 2009). The mitigating factors need to address three fundamental factors of supply chain, that is, the product, demand and supply. Supply management refers to the factors that affect the supply of product such as the firm should have reliable suppliers of raw materials. The management may also decide not to rely on only one supplier, but engage several different suppliers to militate against political and natural uncertainties that may affect a given supplier. For effective implementation of such policy, the suppliers should be distributed in different geographical locations (Gurnani, 2012). Evidence has always proven that over reliance on a single supplier poses greater risk as compared to having several different suppliers (Free, 2009).
Consumer demands keeps on changing, thus the firm should always be updated on current consumption trends to remain relevant in the industry. This will therefore require that the firm be involved in research to meet the current demands and innovate new products. The firm will therefore be able to practice product management, which is an essential factor in mitigation of supply chain risks (Gurnani, 2012).
Finally, the management should focus on demand management that seeks to address the changes of demand in the market. Different strategies can be employed in managing demand depending on the industry involved, such as in servicing industries such as hotels and airlines; firms set very high prices during peak seasons so as to shift the demand for the service to off peak season where they charge at relatively low prices (Gurnani, 2012). This form of demand management is known as price mechanism (Gurnani, 2012). Another strategy that can be used is the solo-rollover whereby the firm sells a new product in different markets that do not have overlapping selling seasons. This form of demand management is suitable in situations where the selling season between the two markets is caused by natural time delay such as the selling season of skiwear in the US ends in May while the season begins in June in South America (Free, 2009).
The recent natural calamities have enabled the management to realize the importance of identifying the sources of supply chain risks and considering their mitigation factors. This analysis will assist the management by improving their profitability even though the process of supply chain risk management is also costly (Gurnani, 2012).Supply risk management should therefore be a core component in the management process. The management should therefore focus on the three components in analysis of risk, that is, supply chain risk identification, risk evaluation and finally supply risk mitigation.
Free, M. (2009, October 1). Supply Chain Risk, volatility offer opportunity. (Free Thinking). MoldMaking Technology, p. 5.
Gurnani, H. (2012). Supply chain disruptions: theory and practice of managing risk. London: Springer.
Supply Chain Management (SCM): High-impact Strategies – What You Need to Know: Definitions, Adoptions, Impact, Benefits, Maturity, Vendors. (n.d.). Scribd.
Supply chain risk management; minimizing disruptions in global sourcing. (Brief Article) (Book Review). (2008, May 1). Reference & Research Book News , pp. 7-10.
Waters, C. D. (2011). Supply chain risk management vulnerability and resilience in logistics (2nd ed.). London: Kogan Page.