SUPPLY CHAIN RISK MANAGEMENT
Scope and definition of the assignment problem
Why are supply chains becaming vulnerabiles?
Definition of risk
Supply risk dimensions
Perception of supply risk
Supply chain risk management
8.1. How to avoid 6 management pitfalls
1. SCOPE AND DEFINITION OF THE ASSIGNMENT PROBLEM
The aim of this paper is to describe and analyse the supply risk management in the field of strategic purchasing. Starting giving a definition of the concept of risk and describing the risk dimensions, I'll talk about the perception of supply risk and I'll finish my assignment describing how firms can manage the risk.
Using the course literature, other secondary sources and contents of two courses of my master in Italy (Ratail&channel management and Trade marketing), I tried to give an overall view on risk management in strategic purchasing.
Purchasing decisions involve high risks: so strategic purchasing in not just value optimization, but securing and defending the company against potential losses. The global enviroment is putting under pressure the modern organizations and due to the increased competition, that is becaming stronger, the best solution for remain efficient is to take risks. In the past years, risk has been seen as negative for organizations; today the scenary is changing and risk is seen as an opportunity and a challange for apport innovations in companies. Procurement professionals are changing their mind, shinfting from a risk adverse approach to a modern approach, which means finding new solutions to monitor the risk process step by step, in a proactive and structured way.
4. WHY ARE SUPPLY CHAINS BECAMING VULNERABILES?
There are several factors that are making supply chains more vulnerabiles. These are the main motives: Globalization of the supply chain
Volatility of demand
Reduced supplier base
Deverticalisation production systems
Focus on efficiency rather than effectiveness
Fig. 1. Globalization of the supply chain, an example
Source: personal elaboration
5. DEFINITION OF RISK
In strategic purchasing literature we can find several definition of risk. The most common is “the probability of a loss X the effect (significance) of this event or the deviation of one or more results of one or more future events from their expected value” Mitchell (Mitchell, 1995) define risk (R) as the product of the probability (P) of a loss (loss) and the significance or impact (I) of the loss, related to an event n (n):
Rn = P(loss)n x I(loss)n
Yates and Stone (1992) have completed the Mitchells definition, identifying the three main components of the risk construct:
potential losses (more/less possibility, depending on the nature of the risk) uncertancy of those losses (how much the loss can be predicteble) significance of those losses (loss importance for the company)
Jacoby and Kaplan (1972) and Roselius (1971) identifies six different types of losses:
Financial loss, that is a loss of money or a decrease in financial value. Performance loss,
Physical loss, that is a loss of tangible assets
Mitchell (1995) extended this division of losses, saying that there are two main forms of losses: losses to the purchaser her/himself
losses to the purchaser's organisation (regarding only financial and time losses)
6. SUPPLY RISK DIMENSIONS
It is important to firstly identify categories of risk, to give a guideline to organization in the first steps of their supply chains. There are several kinds of risk, obviously depending on the organizational structure and the It is often useful to consider categories of risks as a starting point to guide organizations in an initial assessment of their supply chains. Table 1 summarizes various forms of supply chain risks and vulnerabilities.
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