Risk exposure has become magnified by greater uncertainties in supply and demand, globalisation of the market, shorter and shorter product and technology life cycles, and the increased use of manufacturing, distribution and logistics partners resulting in complex international relationships. It is essential to understand the risks your company bears in comparison with your suppliers and customers. The supply chain is not necessarily a win/win environment.

The cost of mismanagement: According to Martin Christopher and H.L. Lee of Cranfield and Stanford universities (and the source of this article), supply chain risks come in many different forms. First, the financial risks can be huge. Inventory costs due to obsolescence, markdowns and stock-outs, can be significant. Personal computers devalue by more than one percent per week. Recent statistics showed that retail markdowns constitute about 20% of total retail volumes. Mismanaged supply chains, leading to excessive or mismatched inventory, are thus liable to huge financial risks. Financial risks can also present themselves through the risk of reworking stock and penalties for non-delivery.

Complexity and mistrust: The complex and uncertain forces of a supply chain can also drive the "chaos" risks. These chaos effects result from overreactions, unnecessary interventions, second-guessing, mistrust, and distorted information throughout the chain. The well-known bullwhip effect, which describes increasing fluctuations of order patterns from downstream to upstream supply chains, is an example of such chaos. The management theorist Edwards Deming called this "nervousness". This increased nervousness will lead to higher costs and inefficiencies through over-ordering and "squirreling" inventory.

Impact of nervousness: The existence of nervousness and chaos also means that it is impossible to make the right decisions for every player in a supply chain. The risks of making the wrong or ineffective decisions, or decision risks, become the inevitable consequence. Thus, for example, it will not be possible to design optimal production schedules if there is uncertainty as to when materials or components will be available. Ultimately, the supply chain is exposed to market risks, i.e., missing the market opportunities presented. Lost market opportunities: A supply chain cannot respond to changing market trends and customer preferences if the right market signals cannot be obtained. It cannot penetrate a new market segment due to its inability to change production or supplies to meet the new demands. Finally, market opportunities can be missed when customer orders with short order lead times cannot be met.

Where do supply chain risks come from? The intangible lack of confidence leads to actions and interventions by supply chain members, which often collectively increase the risk exposure. A supply chain with a high risk exposure cannot be efficient when there is no confidence in:

- order cycle time;

- order current status;

- demand forecasts given;

- suppliers' capability to deliver;

- manufacturing capacity;

- quality of the products;

- services delivered.

For example, if a sales team believes that order cycle and order fulfillment times are not reliable, it will devise its own means of addressing this. It may order stock so as to have supplies to support key customers and put in "phantom" (i.e. private buffer stock) orders to secure supply, all causing inefficiencies. The inability to quote precise order lead times to customers and the failure to meet the lead times reliably is the quickest path to a loss of market share.

Buffer inventory: With excessive buffer inventory and capacity throughout the chain, as well as long pipelines from end to end, the information pertaining to the status and problems within the supply chain is also less available. It is even harder for the supply chain to be visible, and prompt actions to respond to irregularities or unexpected events are less feasible. Thus, there is even less confidence in the operation, and a vicious cycle of risk repeats itself - lack of confidence creates excessive supply chain risks, which in turns breeds actions by members that would further erode the confidence of the supply chain.

In Summary: While risks tend to paralyse most supply chains, the case is not hopeless. Successful companies are the ones that break the risk spiral through a careful review of the tangible elements of their supply chain, as well as addressing the confidence of users and members through visibility and control. The benefits are much more than cost reduction, but involve the reduction of market risks leading to increase in sales and market share, penetration of new markets, and speedy new product introduction. The efforts are not easy, but the payoffs are potentially huge.

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