Supply Chain Risk Management
Global competition, technological change, and continual search for competitive advantage have motivated risk management in supply chains. Supply chains are often complex systems of networks, reaching hundreds or thousands of participants from around the g
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Supply Chain Risk Management D.L. Olson and D. Wu
Global competition, technological change, and continual search for competitive advantage have motivated risk management in supply chains.1 Supply chains are often complex systems of networks, reaching hundreds or thousands of participants from around the globe in some cases (Wal-Mart or Dell). The term has been used both at the strategic level (coordination and collaboration) and tactical level (management of logistics across functions and between businesses).2 In this sense, risk management can focus on identification of better ways and means of accomplishing organizational objectives rather than simply preservation of assets or risk avoidance. Supply chain risk management is interested in coordination and collaboration of processes and activities across functions within a network of organizations. Tang provided a framework of risk management perspectives in supply chains.3 Supply chains enable manufacturing outsourcing to take advantages of global relative advantages, as well as increase product variety. There are many risks inherent in this more open, dynamic system.
Supply Chain Risk Management Process One view of a supply chain risk management process includes steps for risk identification, risk assessment, risk avoidance, and risk mitigation.4 These structures for handling risk are compatible with Tang’s list given above, but focus on the broader aspects of the process.
Risk Identification Risks in supply chains can include operational risks and disruptions. Operational risks involve inherent uncertainties for supply chain elements such as customer demand, supply, and cost. Disruption risks come from disasters (natural in the form of floods, hurricanes, etc.; man-made in the form of terrorist attacks or wars) and from economic crises (currency reevaluations, strikes, shifting market prices). D.L. Olson, D. Wu (eds.) New Frontiers in Enterprise Risk Management, © Springer-Verlag Berlin Heidelberg 2008
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D.L. Olson, D. Wu
Most quantitative analyses and methods are focused on operational risks. Disruptions are more dramatic, less predictable, and thus are much more difficult to model. Risk management planning and response for disruption are usually qualitative.
Risk Assessment Theoretically, risk has been viewed as applying to those cases where odds are known, and uncertainty to those cases where odds are not known. Risk is a preferable basis for decision making, but life often presents decision makers with cases of uncertainty. The issue is further complicated in that perfectly rational decision makers may have radically different approaches to risk. Qualitative risk management depends a great deal on managerial attitude towards risk. Different rational individuals are likely to have different response to risk avoidance, which usually is inversely related to return, thus leading to a tradeoff decision. Research into cognitive psychology has found that managers are often insensitive to probability estimates of possible outcomes, and tend to ignore po
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