Supply Chain Risk Management

By the 2000s, theorisation of business logistics was largely premised on the SC paradigm. Not surprisingly, the issue of SC risk has emerged. Cooper et al (1997) observe that since the logistical chain evolved into a SC, risks have multiplied and the character of risk is complicating as SCs elongate.

What is “Risk” in SCM?

“Uncertainty” is semantically proximal to risk, but not the term preferred by SCM theorists. That said, Manuj and Mentzer (2008, p. 134) use Milliken’s SC-appropriate definition (1987) of uncertainty as “perceived inability to predict something accurate[ly].”

Risk is conceptualised variously depending on the business literature in which it appears (Manuj and Mentzer, 2008). For SCM, Harland et al (2003, p. 52), defined risk as “chance of danger, damage, loss, injury, or any other undesired consequences”. Mitchell (1995) observes that risk connotes various types of loss, and argues that risk of loss is the sum of probability and significance. Given this breadth of conceptualisation, it becomes incumbent on the researcher to identify the components common to the influential definitions. According to Manuj and Mentzer (2008), there are three common components: 1.the nature of potential losses; 2. likelihood of a risk becoming an event; and 3. the business continuity significance of the loss.

Naturally, the sources of SC risk have become germane to the study of SCM. To Christopher (2000) and Cohen et al (2000), one key source of risk is demand uncertainty. Ritchie and Brindley (2000) and Johnson (2001) attribute SC risk to a duplex composite of demand- and supply-side uncertainty. The foregoing are somewhat circular deductions: risk is rooted in uncertainty. The point to note is that risk, when defined in such narrow terms, is rectifiable without breaching SCM principles – by improved integration between marketing and production functions, for example (Christopher 1997, 2000).

There is sharp contrast between those definitions and those of March and Shapira (1987, p. 1404), who describe risk as “variation in the distribution of possible outcomes, their likelihoods and their subjective values” and Christopher’s broadened definition (2011), in which SC risk is the probability of SC disruption multiplied by the impact of that disruption. These generic definitions do not beg remediation in SCM terms.

Christopher and Peck (2004) aver that the lengthening of SCs servicing global operations increases SC vulnerability, which, consequentially, becomes an issue of managerial criticality. To reap the efficiency and effectiveness advantages of their SCs, organisations and their value-creating processes rely on stable links and nodes. Manuj and Mentzer (2008) report that internationally active firms operate complex SCs that demand coordinated cross-border exchange of information, materials, capital, and goods. It is rational to assume that the performance of a globally diffuse SC is dependent upon multiple factors, some of which will be purely logistical/operational (transportation or quality related), structural (coordination and control related), microeconomic, and cultural/interpersonal. To date, concentration has been on the logistical/operational factors in this matrix.

SC economies – typically low cost labour and sourcing – are common drivers of internationalization. Harland et al (2003) list the enticements of global SCs: outsourcing; borderless transfer of capital, information, people, products and services; expansive e-business opportunities; acquisition of human capital and technology; and exploitation of economies of location. The literature of international business contains two currents of relevance to SCRM: the position that overseas “location advantages” attract investment (Dunning 1977, 1988), and the cautionary counter that internationalization carries risk (Hymer 1960,1976).

The literature acknowledges and categorizes risk, and shows vulnerability as present in SCs, but lacks conceptual frameworks and empirically supported theorization to furnish practitioners with normative guidance on global SCRM.