Risk Management in Supply Chain

This is a series on Supply Chain Basics looking at the discipline from the Society of Operations Management perspective. Supply chain is also essential to project management as PMs are typically trained in world class contracting. For example, my Masters program had several courses involving contracting and the Defense Acquisition Workforce Improvement Act, DAWIA, certification highlights the combination of project management and supply chain. In this post, we will explore Risk Management Strategy adding some additional support as well.

Risk Management in Supply Chain

The very nature of business is undertaking acceptable risk. Thus, all investments have risk including investing in a supply chain design. There are many dangers or risk events that lie in wait for business enterprises that usually result in disruptions and legal actions. Redundancies and contingency plans could go a long way towards stabilizing the operations and reducing potential risk.

PMI's approach to risk is very methodological involving categories, risk registers and risk impact matrices. Like PMI, APICs approaches risk  in a similar manner having its own terminology, categories, and tradeoffs.  Like PMI, APICs views risk as having either positive or negative outcomes.

APICS defines risk management as the process of identifying risk, analyzing exposures to risk, and how to best handle those exposures.  In supply chains, risk management is a complex end-to-end concern having risk resulting from increased dependence on critical resources, transport capability, globalization, and other considerations.

The Supply-Chain Council (SCC) defines supply chain risk management as the systematic identification, assessment, and quantification of potential supply chain disruptions with the objective to control exposure to risk or reduce its negative impact on supply chains performance.

Like PMI, the APICS risk management strategy seeks to mitigate, reduce, or eliminate risk. Risk managers must examine the chain to map the entire chain understanding interdependencies; identify failure points; create risk awareness in the chain; and devise contingency solutions for risk events.

Supply risk categories factors according to APICS include external, environmental, technical, and organizational as the same with PMI and the Global Association of Risk Professionals. The risk profile is influenced by the risk factors and the organizations tolerance for risk.

Risk Level = Probability of Occurrence x Magnitude of Loss

Technically, there is a tradeoff between risk and gain. In some cases, the risk is so low or unlikely that the organization accepts the risk. In other cases, the organization may value the risk and seek compensation in the event of positive risk.  Risk avoidance is often difficult but APICS defines it as eliminating risk or to protect objectives from risks impacts. Organizations tend to characterize themselves as either risk-tolerant (usually commoditized goods) or risk-adverse (usually goods that have a probability of lawsuits, death, or monetary loss).   The SCC points out the risk must have a term and a  perspective that defines scope. 

Risk prevention involves a risk response plan and planning. The plan is a document that is similar to the PMI's risk register. Planning is the process of developing the plan. Overall risk prevention involves assessing, balancing costs, contingency plans, and risk sharing.

Risk Management best practices are approved by the SCC to mitigated cost and disruptions. Proactive efforts could offer a competitive edge and support the SCOR model.  There are four basic areas:

1. Formal risk management  
2. Visibility and quantification of risk
3. Coordinated risk management
4. Supply chain designed for risk 

Managing and mitigating risk in the supply chain is critical to the chains success which bear direct responsibility for supply chain success in a risk-laden global network. 

Reference:

(2011). APICS Certified Supply Chain Professional Learning System. (2011 ed.). Version 2.2.