Supply chains have expanded rapidly over the decades, with the aim to increase productivity, lower costs and fulfill demands in emerging markets. The increasing complexity in a supply chain hinders visibility and consequently reduces one’s control over the process. Cases of disruption such as the ones faced by Ericsson and Enron, have shown that a risk event occurring at one point of the supply chain can greatly affect other members, when the disruption is not properly controlled. Supply chain management thus faces a pressing need to maintain the expected yields of the system in risk situations. To achieve that, supply chain management need to both identify potential risks and evaluate their impacts, and at the same time design risk mitigation policies to locate and relocate resources to deal with risk events.
Many industrial cases have shown different outcomes after risk events due to diverse actions (or lack of action) taken in facing supply chain disturbances and disruptions. One typical example is Ericsson’s crisis in 2000. Since Ericsson used a single-sourcing policy, a fire accident in its chips’ supplier immediately disrupted the material supply. Ericsson’s loss was estimated to reach USD 400 million for its T28 model. On the other hand, Nokia which also used the same supplier, managed to avoid further disruption impact by quickly switching to backup sources. This eventually resulted in an increase of up to 30% market share. In June 2008, Volvo Cars reported a 28% reduction in sales compared with the same period in previous year, with the biggest loss of about 50% in its SUVs. Fredrik Arp, then CEO of Volvo Cars stated that “the weak dollar reduces the revenue and it will further reduce the opportunities for R&D”. Another example is the Taiwan earthquake in December 2006, which caused a breakage in the undersea cables and slowed down the internet. One immediate effect was a prolonged waiting time for containers in the Shanghai sea port in China, since all claim procedures rely on information systems.
The above examples show that any material, financial or information risk can create problems in a supply chain. In the fire accident that occurred at Ericsson’s supplier, the material flow in Ericsson was disrupted, and eventually affected the financial flow, while in the second case, the volatility in the exchange rate disrupted Volvo Cars’ financial flow. Finally, a natural disaster affected the flow of information, which resulted in turn in the disruption of port operations. A single risk event can easily disrupt at least one of the supply chain flows. In most cases, the impact of disruption can be observed along the supply chain. Any hiccup within the supply chain will cause delays and even disruption. Most recent incidents, such as the Arab Spring protests, the Sendai earthquake and the Thailand floods in 2011 have shown how such disruptions can severely affect even the most stable supply chain.
The increasing numbers of research studies on supply chain disruptions resulting from economic and political instability, volatile market dynamics, natural disasters or human actions, have shown that risk issues are becoming the new norm in supply chain operations. Despite the increasing concern for risks shown by all members in a supply chain, different disruption impacts affecting them are observed. An individual’s recognition of a problem and preparedness when facing it, alter the impact of disruption and maintain the continuity of the supply chain. On the other hand, without preparation and precaution, it requires time for the system to recover from the impact.
1.2 Definitions of Risk
Risk used to be simply linked to unexpected events. Christopher and Lee (2004) view risk as the “effect of external events such as wars, strikes or terrorist attacks and impact of changes in business strategy”. Kleindorfer and Saad (2005) follow the same line...
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