Risk in Supply Chain Management

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Winter Project Dec’ 2012

A Literature review on Risk in Supply Chain

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Under the Guidance of: Submitted by:
Prof. P.K. Jha Sandeep Singh
Dept. of Industrial Engineering & Management M.Tech 1st year IIT Kharagpur 12IM60R03

Risk in supply chain

1. What is Risk?
Risk can be broadly defined as a chance of danger, damage, loss, injury or any other undesired consequences. A more scientific definition of risk was provided by the Royal Society (1992):‘‘the probability that a particular adverse event occurs during a stated period of time, or results from a particular challenge. As a probability in the sense of statistical theory, risk obeys all the formal laws of combining probabilities’’. Others have developed this scientific perspective of risk, such as Mitchell (1995) and Gillet (1996). Mitchell (1995) defined risk as “the probability of loss and the significance of that loss to the organization or individual”. Mitchell expressed this as a formula Risk = P (loss) X I (loss)

2. Why are supply chains prone to risk?
Global supply chains are formed by a multitude of companies acting as part of a long and complex logistics system. The continuing disintegration and the specialization of operations have made the chains vulnerable to disturbances coming from both inside and outside the system. The visibility of operations outside the companies’ own functions has decreased, and with it the ability to identify risks threatening them and the whole supply chain. Harland et al. (2003) found that less than 50% of the risks were visible to the focal company in the supply chains they examined. The risks that are identified are typically related to the companies’ own functions. In most cases, in terms of business impact, risks of disruption are much greater than the operational risks (Tang, 2006). There is therefore a need for a broader view of the supply chain that would facilitate proper risks identification.

The possible reasons for this are:

• Product/Service complexity
• Outsourcing
• Globalization
• e-business

Product/Service complexity: Increasing demand for product/service performance and variety, combined with more complex product/service and process technologies, has led to increasingly complex products and services. Various dimensions of complexity impacting on supply networks have been identified, including: scale, technological novelty, quantity of subsystems components, degree of customization transformation process, regulatory involvement, number of actors in the network, web of financial arrangements supporting the product/service, and extent of political and stake holder intervention (derived from Rush,2001; Harlandetal.,2000; Harland,1998). One of the effects of increasing product/service complexity is the recognition that single firms cannot be excellent at everything; this gives rise to outsourcing.

Outsourcing: Outsourcing involves the use of specialists to provide competence, technologies and resources to provide parts of the whole (Ford et al., 1998; Gomes-Casseres, 1994; Knight and Harland, 2000; Lonsdale, 1999). Outsourcing not only impacts on the organization and its immediate relationships, but also changes supply network structure and processes. Aggregating these changes; outsourcing changes industry structures (Knight and Harland, 2000), shifting the ‘balance’ of supply markets (Walker et al, 2001). Increased outsourcing allows access to global markets, and may cause organizations to seek international sources for perceived ‘best in class’ performance. This has contributed to supply networks becoming globalised.

Globalization: Outsourcing is only one driver of globalization. The transnational mobility of capital, information, people, products and services is increasing, leading to ‘global entanglements’ (Fombrun and Wally, 1992). Strategic intent, global brands, economies of scale and...
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