Today, many supply chain managers believe that there are multiple risks involved in a supply chain, and yet are often ill-equipped to handle the same. Many of the risk factors develop from a pressure to enhance productivity, minimize waste, remove supply chain duplication, and improve bottom-line.
Risks are typically classified as systematic risks and unsystematic risks. Systematic risks arise from those unavoidable factors in the environment over which the firm can have no control upon. Conversely, unsystematic risks arise from those factors which can be internally controlled by the firm to a large extent.
Risk in supply chain can arise from the following sources.
- Environmental risk: All firms work in an environment. Changes to the environmental factors like competition, political and legal framework or even in national cultures (trade unions) may pose a threat to the firm.
- Industry risk: These risks arise due to changes which may affect the entire industry structure. Say a development of a cheap alternative substitute may pose an extreme challenge to a certain product. Technology changes often creates industry risk.
- Organizational risk: Organizations can undergo massive changes in structure, leadership, culture, processes, technologies and people. Each change poses its own risk and needs to be mitigated in its own way.
- Domain specific risks: These risks may arise from the standing or planning of the top management on strategic issues which may provide a competitive advantage to the company in the long run. Such strategic plans often have high risk exposure and also even more higher perceived pay-offs.
- Risks from the decision maker: The decision maker in each activity in a supply chain is an important link in a chain. His decision making capabilities and decisions have tremendous impact on the performance of the supply chain and the overall performance of the firm.
Understanding these risks and from where they arise is crucial for the success of any supply chain manager.