Risk and Risk Aversion in Supply Chain Management

Introduction

Globalization and free trade around the world have forced the business enterprises to face even tougher challenges than before to survive in the competitive markets today. Companies are collaborating more closely with their upstream and downstream entities in order to design better value chains to reduce cost and satisfy customers. At the same time, they are adopting newer and better strategies to mitigate various risks that their companies are exposed to and achieve supply chain performance.

In general, risk can be defined as the direct or indirect undesirable consequences of controllable or uncontrollable events which affect an individual, a section of individuals or a society at large. Supply chain risk can be defined as the deviation of system profit from expectation as a result of unforeseeable and uncertain events occurred. This risk is of various types such as operational risk, external/internal hazards risk, risk of globalization, financial risk, risk due to technological innovations, etc. Several recent major events and their consequences on business have demonstrated the need to address risk in supply chain. For example, the fire that took place in the Phillips semiconductor plant in Albuquerque, New Mexico, in 2000, caused its major customer, Ericsson, to lose $400 million in potential revenues. Another example is Hurricane Katrina (in 2005) for which 10% - 15% of total U.S. gasoline production was halted. As a result, oil price in U.S. was spiked. More recent example includes shutdown of all air traffic in Norway and much of Northern Europe for a few days (in April, 2010) due to a volcano eruption in Iceland causing an ash cloud to drift into European airspace.

Increasing globalization has opened the door for fantastic business opportunities today, but at the same time it increases supply chain risks. Any company operating across multiple borders must understand the importance of properly managing their supply chains in the face of this ever-changing world. The natural disaster (earthquake and tsunami) in Japan in 2011 has proved the global impact of the incident on shipping and sourcing to and from and thereby, supply chain. Companies across the globe are being affected by the financial crisis due to economic downturn. Although several other factors such as high customer expectations, customer preference/test change, supply and demand uncertainties, and mergers and acquisitions impose external pressures, organizations have to redesign their strategies to mitigate supply chain risks in order to survive in the globally competitive business environment.