Risks in Global Supply Chains

Risks in Global Supply Chains

Source: adapted from Manuj, I. and J.T. Mentzer, (2008) “Global supply chain risk management strategies”, International Journal of Physical Distribution & Logistics Management, Vol. 38, No. 3, pp. 192-223. World Economic Forum (2012) New Models for Addressing Supply Chain and Transport Risk.

The complexity of supply chains requires assessing the types of risks involved and the related factors that may cause them. The risks are interrelated:

  • Supply Risks. Impacts inbound supply, implying that a supply chain cannot meet the demand in terms of quantity and quality of parts and finished goods. The outcome is labeled as a supply disruption.
  • Demand Risks. Impacts elements of the outbound supply chain where the extent or the fluctuation of the demand is unexpected. This is labeled as demand disruption.
  • Operational Risks. Impacts elements within a supply chain, impairing its ability to supply services, parts, or finished goods within the standard requirements of time, cost, and quality. Transportation disruptions are one of the most salient operational risks.

The most significant factors impacting supply chain risks are environmental, geopolitical, economic, and technological. Each factor has a probability of causing disruptions within global supply chains (expressed by a survey of 400 executives performed by the World Economic Forum and Accenture), ranging from high to low. There is also a level of mitigation associated with each factor, ranging from uncontrollable, where an actor has no influence on an event and must thus assume the consequences, to controllable, where an actor has a good level of influence on the event itself and may thus able to mitigate more effectively some of its aspects. The main factors are:

  • Environmental. Considered to be that factors that have among the highest probability of occurrence and that can be the least effectively mitigated since they tend to be uncontrollable. Natural disasters (e.g. earthquakes) and extreme weather are within this category, including potential sea level rises. Pandemics are low probability events, but once they occur, they become high impact events.
  • Geopolitical. Several geopolitical factors tend to have a high probability, namely conflicts and trade restrictions. Still, supply chain actors have a level of influence on the outcome by electing locations that are less prone to these risks and by influencing policy.
  • Economic. The most significant economic factors relate to demand shocks, often associated with sudden political or economic changes. Price volatility is also a concern since it has an important impact on input costs. Like geopolitical factors, supply chain actors have a level of influence on the outcome. For instance, trade restrictions arbitrarily imposed by governments can have important impacts. Still, the industry is able to either comply or to put pressures to have these restrictions changed if they are judged to be unacceptable.
  • Technological. Transport infrastructure failures are fairly rare, so the most salient technological concern involves ICT disruptions. As supply chain management increasingly relies on information technologies for its management and operations, any information system failure has important ramifications.