Managing Supply Chain Risks and Risk Mitigation Strategies

Abstract

IntroductionGlobal supply chain management is exposed to a variety of risks such as demand fluctuations, exchange-rate fluctuations, price fluctuations, supply disruption, and supply delays.2 In addition, because of business activities and growth, management often has created conflicts among risks. Thus, business firms must develop mitigation strategies that effectively manage these risks in the supply chain.3 Supply chain risk management (SCRM) takes a proactive approach to the development of mitigation strategies for supply chain risks, giving important strategic alternatives and insights while overcoming challenges presented by the information and knowledge age.4The purpose of this paper is threefold: 1) to identify, assess, and prioritize supply chain risks; 2) to use the analytic hierarchy process (AHP) technique to support the strategic planning in supply chain management (SCM) decision-making; and 3) to provide business decision makers with a model to identify risk mitigation strategies. Using a business firm (BF) in the Kaesong Industrial Complex (KIC), the study focuses on exploring supply chain risks' characteristics in order to implement risk mitigation strategies that will improve the BF's and the KIC's decision-making planning process and managerial policy.5 The study will suggest risk mitigation strategies that will enable the BF to respond to innovation and new growth, while reinforcing overall ongoing business planning strategies to meet defined requirements in the KIC business setting.Supply Chain Risk ManagementSupply chain management (SCM) is defined as an integrated business philosophy for managing information, materials, and monetary flows among different facilities, suppliers, customers, and logistic levels. SCM includes both internal customers, such as all cross-functional decision-makers within an organization that have direct and/or indirect impact, and external customers such as suppliers, distributors, transporters, warehouses, retailers, and even end users. Because of the many qualitative and quantitative factors which must be included in SCM, planning is a complicated decision-making problem in business.6 Given the complexity of SCM, especially in cross-border supply chains, many studies have applied different business methodologies to real world situations.7Supply chain risk is defined as any risk associated with the flow of materials, information, and monetary transaction in a supply chain process. An effective supply chain risk management (SCRM) strategy embeds risk management into all supply chain functions, from inbound to outbound supply chain streams. Conventional risk management identifies and evaluates the various supply chain risk factors and their potential effects in areas such as purchasing and procurement, manufacturing and production, resources and real estate, outsourcing, logistics and warehousing, inventory, and legal matters. Risk factors can be identified in terms of sources, places, and relationships, or from a managerial function perspective, such as financial risk, operational risk, human resources risk, and information risk.8 Table 1 on page 36 presents categories and drivers of supply chain risks.A more comprehensive SCRM strategy may need proactive participants in the overall SCM planning processes.9 Although managing supply chain risk is a primary business activity, an even more important activity is the identification of proper risk mitigation strategies that will make the business more sustainable and profitable. By identifying risks and developing a pertinent strategy in a supply chain, business firms can align risks to the related strategies. In manufacturing-business firms, four major strategies are cost, quality, delivery, and flexibility.The existence of numerous risk factors makes supply chain decision-making more difficult to plan and implement. It is complicated because many tangible and intangible risk factors must be included in the decision-making process of a supply chain planning process. …