Supply Chain Risk Management

• Supply chain complexity increases the cost potential of risk occurrence, making risk management more important.
• Formal risk management roles are on the rise; existing supply chains are assigning risk management duties to material and operational management.
• Supply chain risks are becoming more visible, which is a major driver of this trend.
• Rewards are available to businesses that improve their risk management practices.
• Activities may lead to outcomes that differ from expectations because knowledge about the future is imperfect.
• Risk is an undesirable outcome that results from imperfect foresight.
• The future is always uncertain, risk is inevitable because no one can perfectly predict the future.

Definition of Risk

• No universal definition of risk exists, but the core idea remains similar across authors.
• Risk is the potential for an adverse deviation from a desired or expected outcome.
• Risk involves objectified uncertainty regarding an undesired event.
• Risk includes the possibility of something unwanted happening or a desired outcome failing.
• Risk is the variation possible in outcomes over a set period.
• Risk measures the difference between actual and expected results.
• Risk is an undesired outcome or the potential for loss that requires multiple possible outcomes.
• There is no risk if only one outcome is possible because only one outcome will certainly happen.
• Variability in possible outcomes leads to risk; the greater the variability, the greater the risk.

Supply Chain Risk

• Supply chain management focuses on moving materials from initial suppliers to final customers.
• Supply chain risk includes any event that can affect or disrupt this movement.
• Risks in the supply chain can disrupt the flow of materials from suppliers to customers.
• Risks might prevent deliveries, delay operations, or damage goods, leading to broader consequences.
• These consequences include halting production, increasing costs, raising stocks of work in progress, and making partners reconsider relationships.
• Shareholder return can decrease by 7–8% upon the announcement of a supply chain disruption.
• Operating income can fall by 42%, and return on assets can drop by 35%.
• Internal risks in normal operations include late deliveries, excess stock, poor forecasts, financial risks, accidents, human error, and IT system failures.
• External risks originate outside the supply chain, such as earthquakes, hurricanes, industrial action, wars, terrorist attacks, disease outbreaks, and price increases.
• Effective supply chains may remove stocks and use just-in-time (JIT) operations.
• Improving efficiency can increase risks; a minor event like a late delivery can halt operations.
• Removing slack from supply chains makes managers more vulnerable, described as "taut" or "brittle."
• In a Chartered Management Institute survey of 440 firms, concern about risk was universally higher across a broad range of threats.
• Supply chain disruption worries are rising, even as fewer firms experience disruptions.
• Supply chains are interconnected; a risk to one member transfers to all others.
• All levels of suppliers are affected when a manufacturer stops production.
• Major events such as the 2003 SARS outbreak; and Hurricane Katrina in 2005 had global supply chain impacts.
• Supply chain risk has received scant attention, but organizations have begun to address it post-9/11.
• Managers can proactively respond by promptly identifying prospective risks.

Risk vs. Uncertainty

• While often used interchangeably, risk and uncertainty differ.
• Uncertainty refers to doubt about a specific outcome, which is a subjective belief.
• Subjectivity stems from personal knowledge and attitudes, allowing for different uncertainties among individuals.
• Risk is measurable with objective analysis from experience, while uncertainty is unmeasurable and subjective without precedent.
• Knight defines risk as measurable uncertainty and uncertainty as unmeasurable uncertainty.
• Risk involves weighing probabilities, while uncertainty can be paralyzing due to its novelty.
• Risk features known outcome distributions, while uncertainty does not due to the uniqueness of situations.
• Preffer defines risk as a combination of hazards measured by probability, and uncertainty as measured by belief.
• Risk is objective, independent of belief, and measurable with statistics.
• Uncertainty is subjective and not objectively measurable; uncertainty is linked to imperfect knowledge.
• More lack of knowledge equates to more uncertainty, but higher uncertainty doesn't always mean higher risk.
• Risk and uncertainty can be present, absent, or mixed independently.

Conditions of Risk and Uncertainty

• Both risk and uncertainty are present when a person working in an assembly line may be exposed to risk of disability and may experience uncertainty.
• Both risk and uncertainty are absent when people believed that earth is flat, but now it is proved to be round indicating there is no risk or uncertainty.
• Risk is present and uncertainty is absent in cases such as the possibility of loss due to interruption of operation by fire due to a failure to recognize risk.
• Risk is absent but uncertainty is present in scenarios such as a man hearing about a plane crash involving his wife not knowing whether she was on the plane.
• Risk is objective, uncertainty is a subjective state of mind, and no necessary relationship exists between them.
• Risk exists even without awareness, uncertainty requires awareness.
• The uncertainty about the risk of cancer from cigarette smoking did not arise until scientific research confirmed the relationship.
• Risk and uncertainty are distinct in practice, although related.

Sources of Supply Chain Risk

• Supply chain risks involve possible mismatches between supply and demand and their effects.
• Risk sources are unpredictable environmental, organizational, or supply chain variables that affect supply chain outcomes.
• Predictable risk consequences include supply chain outcome variables like costs or quality.
• Supply chain risks include delays, forecast errors, system breakdowns, capacity issues, inventory problems, and disruptions.
• Operations risks involve uncertainties inherent in a supply chain like demand, supply, and cost.
• Disruption risks result from natural or man-made disasters, such as floods, earthquakes, and economic crises.

External Risks

• Demand risk relates to disturbances in product, information, and cash flow between the focal firm and its market.
• Cash resource disruptions in the supply chain affect organizational operations.
• Supply risk, the upstream equivalent of demand risk, involves potential disturbances in product or information flow upstream.
• Disruption of key resources affects an organization's ability to perform.
• Environmental risk is associated with uncontrollable external events impacting a firm directly or via its suppliers and customers.
• Environmental risk includes changes from governing bodies, legislation, and customs procedures.

Internal Risks

• Internal risks concern how a firm addresses external risks and its own planning and execution.
• Process risk relates to disruptions to key business processes, affecting the organization's operation.
• Processes are key to maintaining or underpinning competitive advantage.
• Controls are assumptions, rules, and systems governing control over processes and resources, such as order quantities and safety stock policies.
• Control risk arises from the application or misapplication of these controls.
• Mitigation involves hedging risk and reducing operations vulnerability built into business practices.
• Contingency involves planned resource mobilization when a risk is identified, requiring stakeholder understanding of resource availability and procedures.

Importance of Supply Chain Risk Management

• Investing in a risk management system provides multiple benefits.
• It helps to recognize threats and create plans to resolve conflict.
• It offers ancillary benefits to the company.

Systems of Best Practices

• Best practices establish controls for ensuring quality, reducing errors, or maintaining compliance in any industry.
• A primary goal of a good risk management system.
• Risk management audits uncover areas of strength, weakness, waste, and organizational structure.
• It enables best practices for mitigating supply chain challenges.

Improving Communication

• Improvements in communication can resolve multiple risks.
• Supply chain management relies on seamless communication.
• Seamless communication ensures awareness of changes, delays, or service disruptions.
• Risk management systems offer stakeholders communication tools such as cloud-based, SMS, email, or desktop alerts.
• Tracking solutions provide improved visibility, transparency, and supply chain management.

Respond Quicker and Maintain Operations

• Those with a plan in place when a natural disaster strikes can respond quickly and maintain operations.
• Customers, vendors, distributors, and retailers rely on timely commodity delivery.
• Those ahead of the game succeed when others fail by understanding threats and having a risk plan.
• The supply chain faces weather and self-inflicted hurdles that are manageable through planning.

Benefits of Professional Oversight

• Professional 3PL oversight optimizes product development, production, fulfillment, and final delivery.
• It Reduces potential profit loss via early risk detection for the company.
• Provides rapid responses to unexpected situations based on planning and execution.
• Safeguards a businesses reputation via brand security.
• Enhances customer support and satisfaction for overall customer relationship.
• Maintaining compliance by being ahead of regulatory issues.
• Supply chains invest in technology solutions that make sense.
• A comprehensive blueprint aids dealing with unexpected challenges with reduced delays or expenses.

Types of Supply Chain Risk

• Risks in the supply chain disrupt the smooth flow of materials.
• The number of possible risks can appear in almost endless variety.
• Risks include internal risks inherent in operations, risks from management decisions, risks within the supply chain, and risks in the external environment.
• Inherent risks includes accidents, equipment reliability, loss of an information technology system, human errors, and quality issues.
• Managerial decisions entail batch sizes, safety stock levels, financial problems, and delivery schedules.
• Supply chain risks external to organizations occur from interactions among supply chain members.
• Risks from suppliers: reliability, availability of materials, lead times, delivery problems, and industrial action.
• Risks from customers: variable demand, payments, problems with order processing, and customized requirements.
• Inadequate cooperation and lack of visibility are the main causes of supply chain risk.
• External risks are external to the supply chain from interactions with its environment.
• Risks include accidents, extreme weather, legislation, pressure groups, crime, natural disasters, and wars.

Other Classifications

• Internal and external risk is one classification of risk.
• An alternative considers risks to the flows of materials, money, and information in a supply chain which can be grouped into physical, financial, information, or organizational.
• Physical risks include transport, storage, delivery, material movement, and inventory systems.
• Financial risks include payments, cash flows, debt, investments, and accounting systems.
• Information risks include data capture and transfer, integrity, information processing, market intelligence, and system failure.
• Organizational risks include relationships between suppliers and customers, alliances, and shared benefits.
• Strategic risks result from organizational decisions that directly increase risk.
• Natural risks arise from environmental events like extreme weather and earthquakes.
• Political risks stem from government instability, legislation, policies, and conflicts.
• Economic risks stem from interest rates, inflation, currency exchange rates, and taxes.
• Physical risks stem from buildings and facilities that includes accidents and congestion.
• Supply risks stem from material movement issues that includes sources, supply market conditions, and limited availability.
• Market risks stem from customer demand aspects that may include variability, products, and competition.
• Transport risks may include aspects of infrastructure related infrastructure, vehicles, facilities, and loads.
• Product related risks may include aspects of product features, innovation, product mix, range, standardization.
• Operations risks stem from organizational activities, process type, complexity, technology, and service.
• Financial risks relates to money transactions; sourcing funds, profit, and financial performance.
• Information risks relates to data availability, transfer, accuracy, reliability, and security.
• Organization risk is related to organizational structure and its interactions.
• Management risks relate to knowledge, skills, experience, decisions, and aims.
• Planning risks stem from the design and execution of plans for operations including detail and synchronization.
• Human risks are derived from complex interactions; aiming, culture and actions.
• Technical risks encompass technology in processes, communications, designs, and reliability.
• Criminal risks come from illegal activities, such as theft and fraud.
• Safety risks related to accidents and substances.
• Environment risks cover issues like pollution and resource use.
• The management of local permits may provide permits, land use, and policies.

Risk vs. Probability

• Probability differs from risk because it refers to the long-run chance or relative frequency of an event and it particularly relates to objective risk.
• The probability associated with an outcome is the relative likelihood that will occur ranging between 0 and 1.
• Probabilities apply to future events that may happen with varying chances.
• This distribution depends on knowledge, experience, estimation, or belief.
• Risk represents the variation in possible outcomes relative to the entire probability distribution.
• Risk and probability are therefore different.
• Probabilities range from 0 (never occurs) to 1 (always occurs).

Scenarios based on Probability Levels

• Assigning 1 to the probability means it is certain to occur, hence no risk.
• Assigning 0 the the probability means it will not occur, no risk.
• When you toss a coins and calculate likelihood it lands with head it is 0.5.
• Probabilities is a percentage of the occurrence, that can only take a value in the range 0 to 1.
• Probability = 0 means the event will never occur.
• Probability = 1 means the event will always occur.
• Probability between 0 and 1 gives the relative frequency or likelihood.
• Probabilities outside the range 0 to 1 have no meaning.
• There are three ways of finding probabilities for events: calculation, observation and subjective estimates.
• A Priori probability calculating that two people shares a same birthday will be 1/365 days of the year

Methods of Probability Estimation

• Observation measures using historical data to see occurrence probability.
• Subjective estimates are based on someone's opinion about the likelihood of an event.
• Opinion based subjective estimates are unreliable as and should be treated with caution.

Distinction of Risk, Peril, and Hazard

• Risk, peril, and hazard share a common thread of negativity but differ.
• Peril refers to the cause of a loss. It refers specifically to what causes the hazard.
• Hazard create or increase the chance of loss. It affects the magnitude and frequency.

Categories of Hazards

• Physical hazard associates a property and the item.
• Examples is the construction of the material such as wood and bricks.
• Moral hazard comes from the character of the insured.
• Associates with human nature.
• Moral hazard includes dishonesty and exaggeration.
• Morale hazard relates to carelessness and it occurs from lack of concern.
• It is difficult to distinguish between a peril and a hazard.
• Fire can be a peril or a hazard depending on perspective.

Classifying Risks

• Risks can be grouped by cause, economic effect, or other dimensions.
• Financial risks expresses losses in financial terms.
• Non-financial risks lacks implications.
• Dynamic relate to the economy.
• Static risks relate losses.
• Fundamental risks relates to the conditions and it has no relation.
• Particular risks has it's own conditions.
• Objective classify into objective and subjective.
• Pure vs. Speculative contrasts the underlying situation.
• Insurable refers to three categories personal risk, property risk, and liability risk.
• Property risk associate the ownership of property.
• Personal risk is the possibility of loss.
• Liability risk has it's terms that involves penalty.

Speculative Risks

• Speculative presents favorable to unfavorable consequences
• Both speculative exist at the same time.
• Pure and speculative is a building and rise.
• Risk manager are concerned with all pure risk.

Risks in business Activities

• Risks are speculative in business activities
• Finance literature considers five types of risk: business risk, financial risk, interest rate risk, purchasing power risk, and market risk.
• Business risk is related to the physical risk.
• Financial risik relates to debt financing.
• Interest rate risk relates to changes from interest rates.
• Purchasing power risk relates to inflationary situations.
• Market risk relates to stock market.

Summary of risk

• Risk is a chance of an unexpected harm.
• Risk can be a range of inconveniences to events such as natural disasters.
• Mitigations may include the most obvious effects such as spare capacity.
• Reactive approach is slow and causes harm.
• Proactive approach is to analyze effects to mitigate the effects.
• Managing risk is a positive balance view by managers.
• Risk analysis can categorize as uncertainty, risk, and ignorance.
• Analyses used to deal with each level of uncertainty and value.