Supply chain risk
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Supply chain risk is the potential for losses or disruption of operations due to unforeseen events or changes in the supply chain. Supply chain risk management involves identifying, assessing, mitigating, and monitoring risks associated with the sourcing, production, and distribution of products and services. It involves designing strategies and processes to ensure the continuity of operations, quality of products and services, and to protect the organization from any potential threats or disruptions. It also involves understanding the potential risks that can affect the supply chain and taking pro-active measures to reduce the impact of any potential risks.
Example of supply chain risk
- Natural Disasters: Natural disasters such as earthquakes, floods, hurricanes, and tornadoes can cause significant disruption to a supply chain. For example, a major earthquake in Chile in 2010 caused losses of over $30 billion in damages and disrupted the global supply chain, particularly the copper market.
- Cybersecurity Risks: Cybersecurity risks refer to risks of a data breach or cyber attack that can compromise the integrity of the supply chain. An example of a cybersecurity risk is a ransomware attack, which can lock up a company’s data and systems, preventing it from conducting business until the ransom is paid.
- Political Instability: Political instability in a country or region can cause disruption to the supply chain, as it can lead to changes in laws and regulations that can affect the availability and cost of resources. For example, the US-China trade war has caused disruption to the global supply chain due to the tariffs imposed on goods and services.
- Supply Chain Disruption: Disruption to a company’s supply chain can occur due to a variety of factors, including supplier failure, transportation delays, and natural disasters. For example, a truck driver strike can cause a disruption to the supply chain, as it can lead to delays in the delivery of goods and services.
When to use supply chain risk
Supply chain risk management should be used whenever there is potential for disruption or damage to the supply chain. It is important to understand the potential risks that can affect the supply chain and take pro-active measures to reduce the impact of any potential risks. Some of the applications of supply chain risk management include:
- Identifying and analyzing potential risks: Identifying the potential risks that can affect the supply chain and assessing their impact on the operations.
- Developing strategies and processes: Developing strategies and processes to ensure the continuity of operations, quality of products and services, and to protect the organization from any potential threats or disruptions.
- Monitoring and responding to risks: Monitoring and responding to risks by taking proactive measures to reduce their impact.
- Establishing risk management policies: Establishing risk management policies and procedures to ensure that the organization is prepared for any potential risks.
- Conducting risk assessments: Conducting risk assessments to identify and assess the potential risks and develop appropriate response plans.
Types of supply chain risk
Supply chain risk can take many forms and have a wide range of impacts, from minor disruptions to significant losses. The following are some common types of supply chain risks:
- Financial Risk: This is the risk of financial losses due to changes in currencies, interest rates, and exchange rates.
- Operational Risk: This is the risk of disruption to operations due to unexpected events or changes in the supply chain. This could include natural disasters, shortages, or changes in customer demand.
- Regulatory Risk: This is the risk of non-compliance with applicable laws and regulations, which could lead to financial penalties or other legal action.
- Quality Risk: This is the risk of providing products or services that do not meet customer quality expectations, due to issues with suppliers or production processes.
- Security Risk: This is the risk of disruption to operations due to security threats, such as cyber-attacks, data breaches, or theft.
- Reputational Risk: This is the risk of damage to an organization’s reputation due to negative publicity or public opinion.
Limitations of supply chain risk
The limitations of supply chain risk are numerous, including:
- Difficulty in identifying and assessing the risk: Risk identification and assessment can be a complex and time-consuming process. It requires the use of sophisticated techniques and data analysis to identify potential risks and then assess their impact on the supply chain.
- Difficulty in predicting future risks: It is difficult to predict future risks, as the environment is constantly changing and new risks can emerge at any time.
- Difficulty in mitigating risks: Mitigating risks requires the implementation of strategies and processes to reduce the impact of the risk. This is often difficult to do in a timely manner and can be expensive.
- Difficulty in monitoring risk: Supply chain risk is constantly changing and evolving, and it can be difficult to monitor and respond to any new risks that arise.
- Difficulty in managing multiple risks: Supply chain risk can involve multiple stakeholders and suppliers, which can make it difficult to manage multiple risks at the same time.
Suggested literature
- Tang, C. S. (2006). Perspectives in supply chain risk management. International journal of production economics, 103(2), 451-488.
- Ho, W., Zheng, T., Yildiz, H., & Talluri, S. (2015). Supply chain risk management: a literature review. International Journal of Production Research, 53(16), 5031-5069.
