12 - Managing risk in global supply chains

Summary

With supply chains stretched around the globe, how can companies manage the inherent risks of moving raw materials, components, and finished products across diverse cultures, currencies, and regulations? This chapter discusses two basic types of risk management issue for global supply chains: matching supply to demand and addressing disruptions to supply chain activity. On the first issue, there is much to be learned from options-based thinking and flexibility/risk-sharing features of contracting theory. Innovations such as B2B marketplaces, in particular, offer opportunities to manage and mitigate risks. On the issue of disruption risks, a body of literature on so-called “operational risks” provides guidelines for best practice in the identification of potential vulnerabilities and an array of response mechanisms for spotting potential problems before they become disasters.

The Taiwan earthquake of September 1999 sent shock waves through the global semiconductor market. The terrorist attack on the World Trade Center on September 11, 2001, also led to significant disruptions of global supply chains in many industries. As supply chains have become more complex and geographically dispersed, the risks of disruption have increased. In addition, increasingly lean designs and global supply chains, snaking through a network of suppliers to reach dispersed global markets, have created new risks in matching supply and demand.

These two types of risks – disruption and coordination (supply/demand matching) – have become increasingly important and complex in global markets. How can companies identify and better manage these risks?