Contemporary Business Studies - Academy of Knowledge Process ...

International Journal of Contemporary Business Studies
Vol: 3, No: 1. January, 2012 ISSN 2156-7506
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compress lead times, adapt to unanticipated changes in demand, and to cope with environmental
uncertainty in the marketplace. However, the interdependencies created among participating organizations
via integrated supply networks make them more vulnerable to supply chain disruptions, thus increasing
risks.
3. SUPPLY CHAIN RISKS
Spekman and Davis (2004) define risk as the probability of variance in an expected outcome. Therefore, it
is possible to quantify risk because it is possible to assign probability estimates to these outcomes (Khan
and Burnes, 2007). On the contrary, uncertainty is not quantifiable and the probabilities of the possible
outcomes are not known (Knight, 1921). A joint evaluation of risk and uncertainty conducted by Yates
and Stone (1992) suggests that risk implies the existence of uncertainty associated with a given outcome,
because if the probability of an outcome is known, there is no unknown risk. Thus, uncertainty can be
regarded as a key determinant of risk that may not be entirely eradicated, but can be mitigated through the
deployment of risk reduction action steps (Slack and Lewis, 2001). In business situations, managers are
expected to reduce the organization’s exposure to uncertainty through the deployment of effective risk
management strategies.
Internal and external uncertainties both provide sources for supply chain risks (Cucchiella and Gastaldi,
2006). Changes in capacity availability, interruptions in information flows, and reductions in operational
efficiencies are all possible sources of internal uncertainty. External sources of uncertainty leading to
increased supply chain risks include the actions of competitors, price fluctuations, changes in the political
environment, and variations in supplier quality. These sources of uncertainty can be considered ‘risk
events’ that can lead to supply chain disruptions that inhibit performance. Thus, it is necessary for
managers to first understand the various categories of risks along with the events and conditions that drive
them before they attempt to devise approaches to reduce supply chain risks (Chopra and Sodhi, 2004).
The research literature offers a variety of approaches for categorizing risks in supply chain networks. For
example, Treleven and Schweikhart (1988) have classified supply chain risk events based upon their
association with the following: supply chain disruptions, price fluctuations, inventory and scheduling
changes, technology advancements, and quality issues. Kleindorfer and Wassenhove (2003) designated
supply chain co-ordination and supply disruptions as categories of supply chain risks, and Zsidisin (2003)
defined supply risk as the probability of an incident associated with failures in the inbound supply from
individual suppliers or the supply market, which results in the inability of the purchasing firm to meet
customer demand or causes threats to customer life and safety. Paulsson (2004) classified supply chain
risks as operational disturbances, tactical disruptions, and strategic uncertainties. Giunipero and Eltantawy
(2004) categorized these risks based upon conditions that result in their creation, such as political events,
product availability, transportation distances, changes in technology and labor markets, financial
instability, and management turnover. Supply chain disruptions, delays, systems, forecasts, intellectual
property, procurement, receivables, inventory, and capacity are classifications for supply chain risks
offered by Chopra and Sodhi (2004).
Several researchers have chosen to categorize supply chain risks in the following manner: demand-side
risks resulting from disruptions emerging from downstream supply chain operations (Suttner, 2005);
supply-side risks residing in purchasing, supplier activities, and supplier relationships (Wu et al, 2006);
and catastrophic risks that, when they materialize, have a severe impact in terms of magnitude in the area
of their occurrence (Wagner and Bode, 2006). Nagurney et al (2005) define demand side risk as the
uncertainty surrounding the random demands that often occur at the retailer stage of the supply chain. Wu
et al (2006) state that inbound supply risk is defined as the potential occurrence of an incident associated
with inbound supply from individual supplier failures or the supply market. This results in the inability of
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