AN OVERVIEW OF SUPPLY CHAIN RISK MANAGEMENT
By the end of the session, learners should be able to;
a. Describe the concept of supply chain risk management
b. Determine the categories of supply chain risks
c. Explain the impact of risks in supply chain
d. Discuss the significance of managing risks in supply chain
THE CONCEPT OF SUPPLY CHAIN RISK MANAGEMENT
Supply chain risk management (SCRM) is the process of identifying, analyzing, planning
how to manage the risks and mitigating the risks that can affect supply chain supply chain
performance. These risks can be internal supply chain or external supply chain risks which
can be caused by various factors.
SCRM is an essential part of any organization's risk management strategy. By effectively
managing supply chain risks, organizations can minimize the impact of disruptions and
ensure that they can continue to operate even in the face of adversity.
THE CATEGORIES OF SUPPLY CHAIN RISKS
Internal supply chain risks are those that are within the control of the supply chain players,
or that are caused by the behaviors of supply chain players such as suppliers, manufacturer,
wholesalers and retailers.
Any factor that leads to either local optimization by different stages of the supply chain, or an
increase in information delay, distortion, and variability within the supply chain, is an
obstacle to coordination and we consider it to be internal supply chain risk. If managers in a
supply chain are able to identify the key obstacles, they can then take suitable actions to help
achieve coordination.
We divide the major obstacles into five categories:
• Incentive obstacles
• Information-processing obstacles
• Operational obstacles
• Pricing obstacles
• Behavioral obstacles .
1. PREPARED BY CPSP (T) AND CPA (IP) ABUBAKARI MRISHO, 0717581404,
mrishoabuu27@[Link]
I. Incentive obstacles
Incentive obstacles occur in situations when incentives offered to different stages
or participants in a supply chain lead to actions that increase variability and reduce
total supply chain profits.
a. Incentive obstacles that lead to local optimization within functions is the
one which focus only on the local impact of an action result in decisions that
do not maximize total supply chain profits. For example, if the compensation
of a transportation manager at a firm is linked to the average transportation
cost per unit, the manager is likely to take actions that lower transportation
costs even if they increase inventory costs.
b. Incentive obstacles among stages of supply chain refer to situations where
incentives offered to different stages or participants in a supply chain lead to
actions that increase variability and reduce total supply chain profits. This can
happen when the incentives are misaligned, meaning that they do not
encourage all parties to work towards the same goal. For example, a retailer
might be incentivized to order more inventory than they need in order to avoid
stock-outs, even if this leads to higher costs for the supplier.
c. Sales Force Incentives. Improperly structured sales force incentives are a
significant obstacle to coordination in a supply chain. In many firms, sales
force incentives are based on the amount the sales force sells during an
evaluation period of a month or quarter. This increased variability in the order
pattern, with a jump in orders toward the end of the evaluation period
followed by very few orders at the beginning of the next evaluation period.
II. Information-processing obstacles
Information-processing obstacles occur in situations when demand information is
distorted as it moves between different stages of the supply chain, leading to
increased variability in orders within the supply chain.
Key point: The fact that each stage in a supply chain forecasts demand based on
the stream of orders received from the downstream stage results in a magnification
or great extent of fluctuations in demand as we move up the supply chain from the
retailer to the manufacturer.
2. PREPARED BY CPSP (T) AND CPA (IP) ABUBAKARI MRISHO, 0717581404,
mrishoabuu27@[Link]
Lack of information sharing. The lack of information sharing between stages of
the supply chain magnifies the bullwhip effect. For example, a retailer such as
retailer of bakhresa products may increase the size of a particular order because of
a planned promotion. If the manufacturer is not aware of the planned promotion, it
may interpret the larger order as a permanent increase in demand and place orders
with suppliers accordingly. The manufacturer and suppliers thus have a lot of
inventory right after the retailer finishes its promotion. Given the excess inventory,
as future retailer’s orders return to normal, manufacturer orders will be smaller
than before. The lack of information sharing between the retailer and
manufacturer thus leads to a large fluctuation in manufacturer orders.
III. Operational obstacles
Operational obstacles occur when actions taken in the course of placing and filling
orders lead to an increase in variability. Firms may order in large lots because
there is a significant fixed cost associated with placing, receiving, or transporting
an order. Large lots may also occur if the supplier offers quantity discounts based
on lot size.
Ordering in Large Lots
Firms may order in large lots because there is a significant fixed cost associated
with placing, receiving, or transporting an order. Large lots may also occur if the
supplier offers quantity discounts based on lot size.
Large Replenishment Lead Times
The bullwhip effect is magnified if replenishment lead times between stages are
long.
Rationing and Shortage Gaming . Rationing allow someone to have only a fixed
amount of a commodity. Rationing schemes that allocate limited production in
proportion to the orders placed by retailers lead to a magnification of the bullwhip
effect. This can occur when a high demand product is in short supply. HP, for
example, has faced many situations in which a new product has demand that far
exceeds supply. In such a situation, manufacturers come up with a variety of
mechanisms to ration the scarce supply of product among various distributors or
3. PREPARED BY CPSP (T) AND CPA (IP) ABUBAKARI MRISHO, 0717581404,
mrishoabuu27@[Link]
retailers. One commonly used rationing scheme is to allocate the available supply
of product based on orders placed.
IV. Pricing obstacles
Pricing obstacles arise when the pricing policies for a product lead to an increase
in variability of orders placed.
Lot Size-Based Quantity Discounts. Lot size-based quantity discounts increase
the lot size of orders placed within the supply chain. As discussed earlier, the
resulting large lots magnify the bullwhip effect within the supply chain.
Price fluctuations. Trade promotions and other short-term discounts offered by a
manufacturer result in forward buying, by which a wholesaler or retailer purchases
large lots during the discounting period to cover demand during future periods.
Forward buying results in large orders during the promotion period followed by
very small orders after that. The promotion thus results in a variability in
manufacturer shipments that is significantly higher than the variability in retailer
sales.
V. Behavioral obstacles
Behavioral obstacles are problems behaviors in organizations of supply chain that
contribute to the bullwhip effect. These problems are often related to the way the
supply chain is structured and the communications between different stages.
Some of the behavioral obstacles are as follows;
1. Each stage of the supply chain views its actions locally and is unable to see the
impact of its actions on other stages.
2. Different stages of the supply chain react to the current local situation rather than
trying to identify the root causes.
3. Based on local analysis, different stages of the supply chain blame each other for
the fluctuations, with successive stages in the supply chain becoming enemies
rather than partners.
4. No stage of the supply chain learns from its actions over time because the most
significant consequences of the actions any one stage takes occur elsewhere. The
result in actions taken by a stage create the very serious problems to other stages.
4. PREPARED BY CPSP (T) AND CPA (IP) ABUBAKARI MRISHO, 0717581404,
mrishoabuu27@[Link]
5. A lack of trust among supply chain partners causes them to be opportunistic at the
expense of overall supply chain performance. The lack of trust also results in
significant duplication of effort. More important, information available at different
stages is either not shared or is ignored because it is not trusted.
External supply chain risks. External supply chain risks involves external environment
factors that may affect the performance of supply chain
Macro environment
The macro environment refers to the broad external factors that affect all businesses in all
industries or all sectors or all markets. These factors are beyond the control of individual
businesses, but they can have a significant impact on their success. The following points
discuss analysis of external macro environment before establishing entrepreneurial venture:
Political factors
A political factor is any aspect of the political environment that can affect a business. This
includes government policies, regulations, stability, and the overall political climate. Political
factors can have a significant impact on businesses, both positive and negative.
For example, a government that is supportive of businesses and has a stable political climate
can create a favorable environment for businesses to operate in. This can lead to lower taxes,
less regulation, and a more predictable business environment. On the other hand, a
government that is hostile to businesses or has an unstable political climate can create a
challenging environment for businesses. This can lead to higher taxes, more regulations, and
more uncertain business environments
The following are some of the political factors:
● Political stability: This refers to the likelihood of the government changing or being
overthrown. A stable political environment is important for businesses because it
provides certainty and predictability. If there is a lot of political instability, this will be
threat for organizations in supply chain.
● Government policies: The government can have a significant impact on businesses
through its policies. For example, tax rates, regulations, and trade restrictions can all
affect the profitability of a organizations in supply chain.
● Trade agreements: Trade agreements between countries can open up new markets
for businesses. However, they can also create new challenges, such as increased
competition.
● Corruption: Corruption can affect ventures in a number of ways. It can increase the
cost of doing business, make it difficult to get things done, and lead to unfair
competition.
5. PREPARED BY CPSP (T) AND CPA (IP) ABUBAKARI MRISHO, 0717581404,
mrishoabuu27@[Link]
Economic factors
Economic factors are the conditions of the economy that affect the success or failure of the
ventures.
The following are some of the factors to consider when analyzing the economic environment
before establishing an entrepreneurial venture:
● GDP growth: This is a measure of the overall health of the economy. A growing
GDP indicates that the economy is expanding and there is more money flowing
around. This can be a good time to start a business, as there will be more potential
customers and investors.
● Inflation: This is a measure of the rate at which prices are rising. High inflation can
make it difficult for businesses to operate, as their costs will be constantly increasing.
However, low inflation can be a sign of a healthy economy.
● Interest rates: This is the cost of borrowing money. High interest rates can make it
more expensive for businesses to finance their operations, while low interest rates can
make it easier.
● Unemployment rate: This is the percentage of the population that is unemployed. A
high unemployment rate can indicate that there is less demand for goods and services,
which can make it difficult for businesses to succeed. However, a low unemployment
rate can be a sign of a strong economy.
● Exchange rates: This is the value of one country's currency relative to another
country's currency. Fluctuations in exchange rates can make it more or less expensive
for businesses to import and export goods and services.
● Government policies: The government can have a significant impact on the economy
through its policies on taxation, regulation, and spending. Businesses should carefully
consider the government's policies before starting a business.
Social factor
A social factor is an external factor that relates to the social and cultural aspects of a society.
By understanding the social factors that affect their target market, businesses can develop
strategies to reach their customers and succeed in the marketplace.
The following are some of the social factors:
● Demographic trends: This includes the age, gender, income level, education level,
and ethnicity of the population in your target market. It is important to understand
these trends so that you can design and produce products and services which meet the
needs of your target market.
● Cultural values: The cultural values of a society can have a big impact on the
success of an entrepreneurial venture. It is important to analyze cultural values of
6. PREPARED BY CPSP (T) AND CPA (IP) ABUBAKARI MRISHO, 0717581404,
mrishoabuu27@[Link]
society in order to establish and run a business which does not compromise cultural
values of society.
● Lifestyle trends: This includes the way people live their lives, such as their wearing
styles, their spending habits, and their leisure or relaxation activities. It is important to
understand these trends so that you can develop a product or service that meets the
needs of your target market.
● Social trends: This refers to the changing attitudes, values, and behaviors of the
population. For example, the increasing popularity of healthy eating and fitness is a
social trend that has affected the food industry. It is important to assess these trends so
that you can develop a products or services that meet the needs of your target market.
● Media: This refers to the mass media, such as television, radio, newspapers, and
magazines. The media can influence people's attitudes and behaviors, and can also be
used to market products and services.
Technological factor
A technological factor is an external environment factor that affects a business by influencing
the development, production, distribution, and marketing of goods and services.
Technological factors can include new inventions, innovations, and improvements in existing
technologies. They can also include the rate of technological change, the availability of
technology, and the cost of technology.
Here are some of the technological factors
The pace of technological change: The speed at which new technologies are
developed and adopted can have a major impact on businesses. For example,
businesses that fail to adopt new technologies may find themselves at a competitive
disadvantage.
● The cost of new technologies: The cost of new technologies can also be a barrier to
adoption. Businesses need to carefully consider the cost of new technologies before
making a decision to adopt them.
● The availability of skilled workers: The availability of skilled workers to use new
technologies is another important factor to consider. Businesses may need to invest in
training or hiring new employees in order to use new technologies effectively.
Environment factor
Environment factor is an external environmental factor that refers to the increasing awareness
of environmental protection and sustainability. This factor is becoming increasingly
important for businesses, as consumers are demanding more sustainable products and
services. Businesses that are seen as being environmentally friendly are more likely to attract
customers.
Some of the specific environment factors include:
7. PREPARED BY CPSP (T) AND CPA (IP) ABUBAKARI MRISHO, 0717581404,
mrishoabuu27@[Link]
● Government regulations: Governments are increasingly enacting regulations to
reduce pollution and protect the environment. Businesses need to be aware of these
regulations and ensure that they are compliant.
● Public opinion: Public opinion is also becoming more focused on environmental
issues. Businesses need to be seen as being environmentally responsible in order to
maintain their reputation and avoid negative publicity.
● Technology: New technologies are emerging that can help businesses reduce their
environmental impact. Businesses need to be aware of these technologies and
consider how they can be used to improve their environmental performance.
● Costs: There can be a financial cost associated with being environmentally friendly.
Businesses need to weigh the costs and benefits of taking steps to reduce their
environmental impact.
Legal factor
A legal factor is an external environmental factor that refers to how the law affects the way
businesses operate and customers behave. Some examples of legal factors include:
● Business registration and licensing requirements: Every country has different
requirements for registering a business and obtaining the necessary licenses. SC
players need to make sure they comply with all applicable laws and regulations in
order to avoid fines or other penalties.
● Taxation laws: The tax laws of a country can have a significant impact on the
profitability of a business. Entrepreneurs need to understand the tax laws that apply to
their business in order to minimize their tax liability and comply with the tax law.
● Employment laws: The employment laws of a country govern how businesses can
hire, fire, and compensate their employees. SC players need to comply with all
applicable employment laws in order to avoid legal problems.
● Intellectual property laws: Intellectual property laws protect the creative works of
individuals and businesses. SC players need to protect their intellectual property rights
in order to prevent others from copying or they should avoid using ideas of other
businesses without permission.
● Environmental laws: Environmental laws protect the environment from pollution
and other hazards. Entrepreneurs need to comply with all applicable environmental
laws in order to avoid fines or other penalties.
In addition to these specific legal factors, SC players also need to be aware of the general
legal climate in the country where they are doing businesses. This includes the stability of
the legal system, the efficiency of the courts, and the enforcement of laws. By
understanding the legal factors that apply to their business, entrepreneurs can minimize
their risk of legal problems and maximize their chances of success.
8. PREPARED BY CPSP (T) AND CPA (IP) ABUBAKARI MRISHO, 0717581404,
mrishoabuu27@[Link]
THE IMPACT OF RISKS IN SUPPLY CHAIN
Here are impacts of risks in supply chain:
1. Product shortages. When there is a disruption in the supply chain, it can lead to
product shortages. This can happen if a supplier is unable to deliver goods, or if there
is a problem with transportation. Product shortages can lead to lost sales, customer
dissatisfaction, and damage to the company's reputation.
2. Increased costs. Supply chain disruptions can also lead to increased costs. This can
happen if the company has to pay higher prices for goods, or if it has to incur
additional transportation or storage costs. Increased costs can erode profits and make
it difficult for the company to compete.
3. Reputational damage. If a company is unable to meet its customer's expectations due
to a supply chain disruption, it can damage the company's reputation. This can lead to
lost customers, decreased sales, and difficulty attracting new customers.
4. Loss of market share. If a company's competitors are able to avoid supply chain
disruptions and continue to meet customer demand, they may be able to take market
share away from the company. This can be a major blow to the company's
profitability.
5. Increased risk of liability. If a company's products are not available due to a supply
chain disruption, it may be liable for damages to customers. This can be a significant
financial burden for the company.
6. Loss of employee morale. When a company experiences a supply chain disruption, it
can lead to employee morale problems. This is because employees may feel stressed,
overworked, and frustrated. Low employee morale can lead to decreased productivity
and increased turnover.
7. Environmental impact. Supply chain disruptions can also have an environmental
impact. This is because when there are disruptions in the supply chain, it can lead to
increased emissions and waste. This can damage the environment and harm the
company's reputation.
9. PREPARED BY CPSP (T) AND CPA (IP) ABUBAKARI MRISHO, 0717581404,
mrishoabuu27@[Link]
8. Financial losses. Supply chain disruptions can also lead to financial losses. This is
because when there are disruptions in the supply chain, it can lead to increased costs,
lost sales, and decreased profits.
THE SIGNIFICANCE OF MANAGING RISKS IN SUPPLY CHAIN
Here are advantages of managing risks in supply chain:
1. Improved decision-making: By understanding the risks that your supply chain faces,
you will be better equipped to make informed decisions about how to operate it. This
can help you reduce costs, improve efficiency, and boost profits.
2. Enhanced agility and flexibility: A SCRM program can help you make your supply
chain more agile and flexible. This will allow you to adapt quickly to changes in the
market or disruptions in your supply chain.
3. Reduced costs: By identifying and mitigating risks, you can reduce the costs
associated with supply chain disruptions. This includes the costs of lost sales,
damaged goods, and increased transportation costs.
4. Improved customer satisfaction: By ensuring that your supply chain is running
smoothly, you can improve customer satisfaction. This can lead to increased sales and
market share.
5. Enhanced compliance: A SCRM program can help you ensure that your supply chain
is compliant with all applicable regulations. This can help you avoid costly fines and
penalties.
6. Strengthened relationships with suppliers: By working with your suppliers to manage
risks, you can strengthen your relationships with them. This can lead to improved
communication, collaboration, and trust.
7. Increased security: A SCRM program can help you improve the security of your
supply chain. This can protect your products from theft, damage, and other threats.
8. Reduced environmental impact: By managing risks in your supply chain, you can
reduce its environmental impact. This can help you improve your sustainability
credentials and attract more environmentally conscious customers.
9. Improved disaster preparedness: A SCRM program can help you prepare for and
respond to natural disasters and other disruptions. This can help you minimize the
impact of these events on your business.
10. Increased profitability: By managing risks in your supply chain, you can improve
your profitability. This can be achieved by reducing costs, improving efficiency, and
increasing sales.
11. Enhanced competitive advantage: By being proactive in managing risks, you can gain
a competitive advantage over your rivals. This can help you attract new customers and
grow your market share.
10. PREPARED BY CPSP (T) AND CPA (IP) ABUBAKARI MRISHO, 0717581404,
mrishoabuu27@[Link]
12. Improved reputation: By demonstrating that you are taking steps to manage risks, you
can improve your reputation with customers, suppliers, and other stakeholders. This
can make it easier to attract new business and raise capital.
13. Improved morale and motivation: By reducing the uncertainty and anxiety associated
with risks, you can improve the morale and motivation of your employees. This can
lead to increased productivity and innovation.
These are just some of the many advantages of managing risks in supply chain. By taking a
proactive approach to risk management, you can improve the efficiency, profitability, and
sustainability of your business.
11. PREPARED BY CPSP (T) AND CPA (IP) ABUBAKARI MRISHO, 0717581404,
mrishoabuu27@[Link]