Supply chain risk may be defined as the risk created by any event that might interrupt the planned operation of a supply chain or network. To put this in context, Martin Christopher defines supply chain management as “the management of upstream and downstream relationships with suppliers and customers to deliver superior customer value at less cost to the supply chain as a whole.” Therefore, in essence, supply chain risk is any interruption to either the inward or outward supply of raw materials, components, or finished products.
While an interruption of the inward supply may result in bringing processes to a halt, with the consequent loss of machine time or labor cost, the outward supply chain is equally critical to customer expectation or contractual obligations. It also has the very real physical manifestation of a build up of stocks (inventory), incurring further expense. The traditional insurance against inward supply chain risk is buffer or safety stock. This is a stock of materials or components held at key points of the supply chain to ensure continuity of supply for a specified period of time without replenishment. Thus, the larger the buffer stock, the longer the anticipated requirements for processing may be met.
The greater the buffer stock, the more money must be tied up in these unproductive stocks. Thus, with the increased cost of money in the 1970s and 1980s, it was realized that better supply chain management, leading to a reduction in buffer stock, would reduce the overall logistics bill.
JIT manufacture was introduced into the motor manufacturing industry in Japan, and Toyota developed kanban and other sophisticated techniques to call forward components only when required to be incorporated into the vehicle under construction. This was extended to delaying components at all levels (place postponement) to spread the costs of stockholding. However, the reduced stockholding increases the risks that may be consequent upon any break or delay in the supply chain. Physical, political, and financial risks in the supply chain include the following:
- Accident or breakdown of transport
- Act of God, such as flood or earthquake
- Loss due to misrouting
- Theft in transit
- War or civil disturbance
- Act of terrorism
- Labor stoppage or strike
- Political embargo against supply
- Insolvency of any tier of supplier, or even in some circumstances, of the carrier
Product risk is not strictly supply chain risk, but such factors as perishability or a hazardous cargo classification require special care to avoid supply chain risk and may lead to products in the supply chain suffering from damage, degradation, contamination, or other third-party risk.
Scale Of Risks And Risk Reduction
Just as supply chain costs tend to increase over distance, so supply chain risk tends to increase in proportion to distance between supplier and customer. The obvious reason is that it takes longer for goods to make the transit, but one also needs to take into account greater inflexibility of transport systems, such as irregularity of shipping services, and increased complexity of the supply process between domestic and international distribution. Unproductive time is the greatest cost in the supply chain.
Methods to achieve a reduction in supply chain risks include the following:
- Keep suppliers close to the next link in the supply chain. The motor manufacturing industry created supplier parks to have their first-tier suppliers adjacent to their factory, so they may call forward components while maintaining a negligible or zero stockholding. However, this may only move the risk upstream to the next tier of suppliers.
- Site factories near ultimate customers.
- Maintain alternative sources of supply, particularly from different points of origin to avoid all suppliers being isolated by a single event.
- Contract with several carriers to eliminate risks because of a problem with any single carrier.
- Ensure that information flow moves at the same rate as product movement within the supply chain.
- Transparent operation of the supply chain between all partners.
- Donald Bowersox, David Closs, and Bixby M. Cooper, Supply Chain Logistics Management (McGrawHill College, 2009);
- Christopher, Supply Chain Management: Strategies for Reducing Cost and Improving Service, 2nd ed. (Financial Times, 1998);
- Christopher W. Craighead, Jennifer Blackhurst, M. Johnny Rungtusanatham, and Robert B. Handfield, “The Severity of Supply Chain Disruptions: Design Characteristics and Mitigation Capabilities,” Decision Sciences (v.38/1, 2007);
- Harrison and R. van Hoek, Logistics Management and Strategy (Pearson Education, 2002);
- Marc J. Schniederjans, Topics in Lean Supply Chain Management (World Scientific Publishing, 2009);
- Janat Shah, Supply Chain Management: Text and Cases (Pearson Education, 2009);
- Charles C. Yang, Mulong Wang, and Xiaoying Chen, “Catastrophe Effects on Stock Markets and Catastrophe Risk Securitization,” Journal of Risk Finance (v.9/3, 2008).
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