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International Journal of Contemporary Business Studies Vol: 3, No: 1. January, 2012 ISSN 2156-7506 Available online at http://www.akpinsight.webs.com An Evaluation of Network Risks in Supply Chains Dr. Archie Lockamy III Margaret Gage Bush Professor of Business Professor of Operations Management Brock School of Business Samford University Birmingham, Alabama, USA ABSTRACT The purpose of this article is to introduce a methodology for evaluating network risks in supply chains. The methodology is proposed as an analytical tool which can be used to assist managers in the examination of network risk levels associated with their supply base. Empirical data from a major US automotive company is analyzed using Bayesian networks. The networks provide a methodological approach for determining a supplier’s external, operational and network risk probability, and the potential revenue impact a supplier can have on the company. The research findings are that Bayesian networks can be used to develop supplier risk profiles to determine the risk exposure of a company’s revenue stream. The supplier risk profiles can be used to determine those risk events which have the largest potential impact on an organization’s revenues, and the highest probability of occurrence. The methodology used in this research study can be adopted by managers to formulate supply chain risk management strategies and tactics which mitigate overall supply chain risks. Thus, as part of a comprehensive supplier risk management program, organizations along with their suppliers can use this methodology to develop targeted approaches to minimize the occurrence of supply chain risk events. Keywords: Supply Chains; Supply Networks; Supply Chain Risks; Risk Events; Supplier Risk Profiles; Bayesian Networks. 1. INTRODUCTION Due to the effects of lessening product lifecycles, demanding customers and employees, decreasing acceptable response times, and increasing levels of global competition on business success, many organizations have formulated extended enterprises known as supply chains. These entities can be described as organizational networks designed to help firms achieve a competitive advantage via improved market responsiveness and cost reductions. According to Sawhney et al (2006), supply chains can also provide organizations with a means for promoting business innovation through the adoption of streamlined information flows, restructured business processes, and enhanced collaboration between network members. A result of an organization’s increased reliance on supply chain networks is its augmented susceptibility to the network risk profiles of its suppliers, as well as other risk categories associated with the supply 6 Copyright © 2012. Academy of Knowledge Process
International Journal of Contemporary Business Studies Vol: 3, No: 1. January, 2012 ISSN 2156-7506 Available online at http://www.akpinsight.webs.com chain. Supplier network risk profiles consist of risk events that can directly impact the structure of the supply chain. Risk events are incidents whose occurrences result in the disruption of overall supply chain performance. Supplier network risk events that could negatively affect supply chain performance include ownership changes, individual supplier strategies, and supply network agreements. Although it is often not possible to precisely predict the occurrence of such events, it is possible to evaluate the probability of their occurrence through the creation of supplier risk profiles. Therefore, it is vital that organizations have the ability to examine the level of network risk associated with the suppliers constituting their supply chains. 1.1 Purpose The purpose of this article is to introduce a methodology for examining network risks in supply chains. The methodology uses Bayesian networks for the creation of supplier risk profiles. The networks are used to determine a supplier’s external, operational and network risk probability and the potential revenue impact a supplier can have on the organization as measured by value-at-risk (VAR). The methodology is proposed as an analytical tool to assist managers in the evaluation of network risk levels associated with their supply base. 1.2 Organization The paper is organized as follows. The first section provided the motivation for and purpose of the paper. A discussion on supply chain management and supply chain risks is provided in Sections Two and Three respectively. Section Four contains an overview of the research methodology and model used in this study. Section Five contains the results of the research. Proposed managerial actions based upon the results of the study are provided in Section Six. Conclusions are offered in Section Seven. Finally, implications regarding study limitations and directions for future research are presented in Sections Eight and Nine respectively. 2. SUPPLY CHAIN MANAGEMENT Christopher (1998) characterized supply chains as organizational networks connected through upstream and downstream processes and activities that produce value in the form of products and services delivered to the hands of the ultimate customer. An increasing number of firms are adopting the principles of supply chain management (SCM) to improve competitiveness (Singh et al, 2005; Li et al, 2006; Gunasekaran et al, 2008). A requirement of SCM is the management of information, material, and cash flows across multiple functional areas both within and among organizations (Faisal et al, 2006). Additionally, Cooper et al (1997) note that SCM can be viewed as a philosophy based upon the belief that each organization in the supply chain directly and indirectly affects the performance of all the other supply chain members as well as, ultimately, overall supply chain performance. A necessary condition for effective SCM is the alignment of functional and supply chain partner activities with firm strategies that are congruent with organizational structures, processes, cultures, incentives, and people (Abell, 1999). It is often necessary for organizations to make fundamental changes to their business focus when adopting the principles and philosophy associated with SCM in order to realize its potential benefits (Kopczak et al, 2003). These changes may include an improved ability to acquire and manage reliable demand information (Croxton et al, 2002); more effective management of physical goods flow through suppliers, manufacturers, distributors, and retailers for increased value to end customers (Jammernegg and Reiner, 2007); and an increased emphasis on cross-functional and cross-enterprise integration (Chen and Kang, 2007). SCM benefits should include enhanced customer satisfaction and value along with improved supply chain reactivity (Gaudenzi and Borghesi, 2006). Supply chain reactivity refers to the network’s ability to 7 Copyright © 2012. Academy of Knowledge Process
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