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Risk in Global Supply Chain

Efficient Supply Chains?²

Under the influence of JIT philosophy, companies have invested a lot of money to create lean supply chains. The focus has been to improve efficiencies in operations and distribution to minimize the system-level inventory. However JIT in itself does not include the concept of risk: the unforeseen disruptions.

Another effort to improve the efficiency has been global outsourcing, to take advantage of the lower production and labor costs.

Thus the focus has been on only one factor - efficiency. The other critical factor of responsiveness - the ability to react faster to changing needs and conditions - has not being considered. However efficiency and responsiveness are two key measures pulling the supply chain in opposite directions and a balance between the two can help overcome the risk that supply chain is exposed to.

Risks Magnification in the Global Context³

Owing to the very nature of a global supply chain, the complexities and uncertainties associated with it are very high. The globalization of business activities leads to increased international flow of goods and information. Goods have to cross longer distances, exposing to further risks in transport. Some parts of the supply chain might be faced with completely different political and economic environments than others. Thus the predictability of risks is more difficult. As and when more countries have to be considered the risks would increase much more. Risk management is hence much more complex in global supply chains than in companies as more possible influences have to be regarded in the decision making process. There are risks that the total acquisition cost including transportation, inventory obsolescence, opportunity cost of lost sales, lower flexibility etc may be greater than anticipated and erode the net benefits that the initial purchase cost imply. Some of the risks faced by the global supply chains will be similar to that in the local ones. However their magnitude, severity or frequency may be higher.

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2 Jayashankar M. Swaminathan, "SARS exposes risks of global supply chains", The Journal of Commerce, 2003.
3 Werner Delfmann and Sascha Albers, "Supply Chain Management in Global Context", www.uni-koeln.de/wiso-fak/planung, 2002.

* Contributed by -
Krishnakanth K. K. & Pankaj Ghai,
PGP Students.
IIM Lucknow.