From Supply Chain Vulnerabilities to Risk - Important Concepts in Supply Chain Risk Management

Daniel Dumke — Mon, 27 Jun 2011 13:43:00 +0000

This blog may be a good starting point for supply chain risk management related research and literature, but even with more than 140 articles reviewed in the blog I still just touched the tip of the iceberg. There are still many basic articles left. Like this one by Helen Peck (2006): “Reconciling supply chain vulnerability, risk and supply chain management”

Terms in SCRM

Today I have a look at, what is basically a literature review concerned with clarifying the confusion with the terms used when talking about risks in supply chains.

There are a wide range of different terms and concepts used in the wider field of supply chain risk management. How do the terms vulnerability and risk correlate and how are those embedded in supply chain management? On another level: How are corporate governance, business continuity management and security and emergency planning relating to SCRM?

Supply Chain

Starting from a “standard” supply chain definition as a system, comprising…

…flows of materials, goods and information (including money), which pass within and between organisations, linked by a range of tangible and intangible facilitators, including relationships processes, activities and integrated (information) systems.

The first definitions for “supply chain management” came up in the early 1980s and developed from a very logistical view on a supply chain towards a network understanding, comprising aspects like marketing or product development as well. There also has to be a clear distinction between a strategic level tasks in SCM and their functional execution.

Vulnerability and resilience

Within SCM there is no clear consensus as to whether supply chain vulnerability is simply a symptom of poor SCM—to be remedied with more effective SCM and the wider adoption of a SCO—or whether it is the unintended downside consequence of its successful application. Perhaps it should rightly be regarded as a combination of all of these.

Supply chain vulnerability can be defined as an “exposure to serious disturbance, arising from risks within the supply chain as well as risks external to the supply chain” and as “a condition that is caused by time and relationship dependencies in a company’s activities in a supply chain”. Vulnerability is therefore seen as a combination of a disturbance and the resulting negative consequence.

The concept of “resilience” is related to risk and vulnerability in so far as it accepts that not all “risks” (hazards or threats) can be avoided, controlled, or eliminated. Instead, resilience focuses on the “ability of the system to return to is original or desired state after being disturbed”, i.e. its ability to absorb or mitigate the impact of the disturbance.

Corporate risk management

Supply chain (risk) management and its counterpart on a corporate level do not share the same origin. Where supply chain management stems from a more comprehensive view on operational management aspects like logistics and operations; corporate risk management originates in a strategic / macroeconomic view on the company.

These roots also lead to a different understanding for risk management. In a case where corporate risk management suggests outsourcing of non-core processes for risk reduction, a supply chain risk management view would imply a larger weight on the negative effects of the reduction in control.

Conclusion

Finally, Peck emphasizes the different aspects of risks in supply chains and highlights the distinctive factors:

Consequently, it is suggested that managerial views of supply chain risk, based on assumptions drawn principally from best practice in manufacturing enterprises, offer a familiar, convenient but incomplete picture of supply chain vulnerability. SCM is an integrative, cross-functional discipline, so it must be recognised that supply chain vulnerability is also a concern for practitioners and academics in other disciplines, including BCM and corporate risk management.

Reference:

Peck, H. (2006). Reconciling supply chain vulnerability, risk and supply chain management International Journal of Logistics, 9 (2), 127-142 DOI: 10.1080/13675560600673578

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Supply Chain Risk Sources, Consequences, Drivers and Mitigation

Daniel Dumke — Wed, 23 Feb 2011 09:35:00 +0000

I just stumbled upon one of the articles I already read about a year ago, shortly after I started my research. Beside indication of a future research agenda (see as well here), Jüttner et al. (2003) also explain some fundamental concepts of supply chain risk management.

How to get there?

Jüttner et al. decided to conduct a exploratory study with practitioner interviews and compare these results with a literature review. Four basic concepts for Supply Chain Risk Management evolved from this, namely Risk Sources, Risk Consequences, Risk Drivers and Risk Mitigation Strategies.

Risk Sources

[are] environmental, organisational or supply chain-related variables which cannot be predicted with certainty and which impact on the supply chain outcome variables

So there are three categories for risk sources: Environmental, Network and Organization.

Environmental risk sources may for example be the result of accidents (eg. fire), socio-political actions (eg. terrorist attacks) or force majeure (like hurricanes or earthquakes)
Network-related risk sources unfold from interactions between organisations within the supply chain, examples are: Lack of Ownership (unclear responsibilites between supply chain partners eg. due to increased concentration and outsourcing), Chaos can result from missing trust or badly communicated information, finally Inertia describes a lack of flexibility within the supply chain.
The interviews showed
a consensus that network-related risks are an important and so far neglected source of risk.
Organisational risk sources can be found within one of the participants of the supply chain in focus and can be found within the production factors like labour (strikes), machines (failure), etc.

To conclude: From the point of view of the links within the supply chain, environmental and organizational uncertainties can be seen as risks “to” the links in the supply chain whereas network-related uncertainties are risk sources “of” the links.

Risk Consequences

Risk can have consequences can be measured ex post by the performance indicators used. Ex ante they are contained within the variances of the indicators. Three different consequences can be named:

Financial consequences
Reputation damage
Health and safety concerns

Risk Drivers

Risk drivers further increase the risk experienced by the supply chain participants (examples: competition increases the risk indirectly, outsourcing (increased complexity) has a direct effect on risks)

The major drivers for risk are: focus on efficiency rather than effectiveness, globalization of supply chains, focussed factories and centralized distribution, the trend to outsourcing and the reduction of the supplier base.

Risk Mitigating Strategies

… can be defined as

strategic moves organisations deliberately undertake to mitigate the uncertainties identified from the various risk sources (Miller, 1992)