Types of Supply Chain Risks and Their Resilience

Source: Adapted from McKinsey Global Institute (2020). Risk, resilience, and rebalancing in global value chains.

There are a number of risks associated with supply chains, each related to a structure that can convey low or high resilience to disruptions.

  • Concentration. Supply chains have a level of concentration that can be reflected in their geography and the density of suppliers in an area. Sourcing from suppliers in a limited number of countries (high concentration) presents more risk than a multi-sourcing strategy that is more resilient. A high concentration level would be sourcing from a single manufacturing cluster. For several product groups, exporters tend to be concentrated in a limited number of countries accounting for the bulk of the supply. For instance, 79% of the provision of computer equipment and 75% of the phones is accounted by five countries. The level of concentration is lower for intermediate goods. For imports, the destinations tend to be much more diversified, reflecting an existing demand irrespective of the origin of the products.
  • Substitution. Supply chains are more resilient when it is possible to switch to another supplier if an issue arises, such as a disruption. When a supply chain relies on a limited number of suppliers, even a single, substitution cannot readily take place.
  • Interconnectivity. Interdependent suppliers represent a risk as they may use their materials and components. Thus, interconnected suppliers could multiply the impact of disruption from a single supplier with cascading effects.
  • Depth. The number of supplier tiers can be a risk factor as several tiers increase the chances of disruption. Further, a deeper supply chain is more difficult to trace when identifying an issue (e.g. defective part) with a third party that relies on its own chain of suppliers.
  • Visibility. The ability to trace suppliers, often referred to as supply chain visibility, allows to identify potential risks and consider alternatives. Further, lack of knowledge about the suppliers involved, particularly at lower tiers, opens additional liabilities involving labor conditions and defective parts.
  • Dependence. Similar to substitution, the level of dependence increases the scale of disruption since a high dependence on a supplier for most inputs can have more substantial impacts than a low dependence in the case of a disruption.
  • Synchronization. The level of functional integration and how tightly integrated supply chains are increasing the risks of disruptions. Supply chains with high delivery frequency and those with high volumes tend to be less resilient. Lack of synchronism (e.g. bullwhip effect).
  • Inventory. Supply chains with higher inventory levels (buffers) tend to be more resilient, but holding inventory comes at a cost. Paradoxically, supply chain efficiency drivers push for the opposite with strategies such as just-in-time.