How to assess and manage risk in supply chains

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How to assess and manage risk in supply chains

1. Introduction

The current trend of outsourcing to low cost countries combined with supplier base reduction has provided significant cost reductions for businesses. However, globalization and implementation of more streamlined supply chains have increased risks for companies when acquiring goods and services needed for their operations.

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By the term risk is meant a chance of facing undesired consequences such as damage, loss, or injury. More scientifically, risk is defined as the combined probability for an undesired event and the potential damage the event might cause. This definition, or variations of this definition, has been applied by a number of researcher investigating risk (March and Shapira, 1987; Zsidisin, 2003; Spekman and Davis, 2004; Wagner and Bode, 2006; Ritchie and Brindley, 2007). The detrimental effects does not have to be existential to the companies, but typically they cause lost sales, decreased market share and large contractual penalties for the parties affected (Zsidisin, 2003).

A very well-know example of such a detrimental effect is the $400 mill loss suffered by the Swedish cell phone manufacturer Ericsson due to a lightning bolt which struck their sub-supplier of semi-conductors (Latour, 2001). Another example is the battle against the foot-and-mouth disease in the UK agricultural industry during the year 2001. This event temporarily paralyzed the agricultural industry, while the tourism industry suffered great losses. Even luxury car manufacturers such as Volvo and Jaguar were affected since deliveries of quality leather used in various parts in the car compartment were temporarily stopped (Norrman and Jansson, 2004). A general ban on sale and export of British pigs, sheep and cattle was introduced during the outbreak. The tourism industry also suffered as many tourists changed their vacation plans due to transport bans and detergent washing of cars, boots and clothing in affected regions.

Similarly, the fruit company Dole lost over $100 million dollars when a hurricane caused massive damage to the area in Central America where their banana suppliers were located (Griffy-Brown, 2003). The outbreak of SARS in Southeast Asia affected various industries such as the electronics industry, retailing, tourism, and the airline industry with losses at the national level stipulated to $38 billion just for Hong Kong, Singapore, Taiwan, and Thailand (Overby et al., 2004). The economic impact of the hurricane Katrina is stipulated to $100-125 billion. More than half of that amount is due to the flooding of New Orleans which paralyzed industry and disrupted normal living conditions in the affected areas (Boettke et al., 2007). However, the most famous of such disruptive events is probably the 9/11 terrorist attack in 2001, which caused immediate financial losses and initiated a massive restructuring of the airline industry (Bhadra and Texter, 2004).

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