Introduction to Risk Management in Supply Chains

This is another introductory article (book chapter) to supply chain risk management. I included it, since it is an early (2003) view on supply chain risk management from another perspective. Many other articles I reviewed up to now are following the “Cranfield School Approach” with (Christopher, Jüttner, …) and this one by Peter Kajüter (Münster University, Germany) shows a different approach developed in parallel.

Basis and literature

Risk is defined as

a future development or event that might adversely impact the achievement of corporate goals.

Kajüter argues that risk management is a entrepreneurial need, which should be established by any company. Most developed countries also “support” this need by further regulation requiring risk management systems to contain the risk on a company level. But there seems to be no regulation demanding risk management which covers the supply chain and

consequently, companies are free to extend the scope of risk management beyond the company level and develop inter-organizational approaches to managing risk.

The literature review shows that two streams regarding risks in supply chains can be distinguished:

• Investigation of mathematical models to analyze risk sharing instruments.
• Focus on conceptual issues in supply chain risk management based on exploratory case studies.

Figure 1: Stages of Supply Chain Risk Management Implementation (Kajüter, 2003)

Corporate and supply chain risk management

Based on the review of the conceptual literature, Kajüter identifies three approaches in supply chain risk management (figure 1).

Depending on the integration stage of the supply chain network and the intensity of collaboration.

Corporate risk management is characterized by individual risk handling of a single company. Supply chain related risks are considered by purchasing risk assessments which are part of the overall risk management.

If buyers and suppliers start to cooperate in managing risks, supply chain risk assessments can be observed. They are characterized by a rather informal communication of risks among the supply chain members and joint efforts to handle them.

Supply chain risk management finally constitutes a structured and formal approach to managing risks by collaboration of supply chain partners. A specific risk management process for the supply chain is established.

So supply chain risk management can be defined as:

Supply chain risk management is a collaborative and structured approach to risk management, embedded in the planning and control processes of the supply chain,
to handle risks that might adversely affect the achievement of supply chain goals.

Risk strategy

The author next proposes the elements of the risk strategy in a supply chain risk management framework: basic principles of risk management, defined risk limits and responsibilities.
The risk management principles are shown in figure 2. Risk limits refer to the levels of maximum damage which can be tolerated and have to be set for each individual company and the overall supply chain.
Lastly the responsibilities have to be defined for the identified risks within the chain. Kajüter suggests establishing a risk owner for each risk and a cross-functional, cross-company risk management committee.

Figure 2: Principles of Supply Chain Risk Management (Kajüter, 2003)

Risk management process

Kajüter suggest a three step process to manage supply chain risks.
The first step includes the risk analysis which has to be conducted on a supply chain level. Figure 3 shows an example.
Step two refers to the risk control, where risk management strategies are employed to mitigate risks, those include: risk avoidance, reduction, transfer and acceptance.
The last step includes risk monitoring and reporting, where processes continuous monitoring of identified risks have to be found.

Figure 3: Risk Assessment Portfolio (Kajüter, 2003)

The author concludes:

An interorganizational approach to risk management in supply chains facilitates risk management at the single firms and offers opportunities to improve supply chain performance. It requires a high level of trust and mutual respect among the individual companies, though.

Conclusion

Kajüter delivers answers for three basic questions in supply chain risk management.

1. What are the stages of supply chain risk management and how is it different from corporate risk management?
2. What are the three major parts of supply chain risk management?
3. How can the process of supply chain risk management be employed in a supply chain and company?

Of course, this 16 page chapter can only give hints on the implementation side, but not cover every aspect. I did not like the risk categorization very much, or at least the wording (mathematical models for risk sharing or conceptual works) leaves out much quantitative literature which just investigate risk mitigation strategies.

But all in all the article makes a great starting point for supply chain risk management endeavors in business and research.