Managing Risk to Avoid Supply-Chain Breakdown

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The article emphasizes the importance of implementing adequate risk management strategies in order to prevent the collapse of an organization's supply chain. It is based on a case study of Royal Philips Electronics, N.V, a provider of microchips to corporations including Nokia Corporation. In the year 2000, Royal Philips' activities were interrupted by a fire that destroyed millions of microchips (Chopra and ManMohan 53). Nokia's production suffered minimally because it had several suppliers and was quicker to adapt to the risk. Ericson's manufacturing, on the other hand, was halted for several months due to their reliance on Philips as their sole supplier. These different outcomes from a failure in one supply chain source illustrate the significance of effectively managing the supply chain risks. The main determinants of the costs and suffering of an organization from the supply chain risks are; the type of disruption experienced and the preparedness level of such an organization (Chopra and ManMohan 53).

To avoid such disruptions in the supply chain, managers need to devise effective means of tackling risks, and this should first involve understanding the events and conditions that trigger them. The supply chain risks are grouped into various categories. One category is for delays which are caused by factors such as inflexibilities in the supply source, high capacity utilization and poor quality in supply source (Chopra and ManMohan 54). There are also disruptions caused by natural disasters, war, and terrorism as well as labor disputes. Another category is the systemic risk which involves the breakdown of supply infrastructure. Inaccurate forecast and the bullwhip effect also can lead to forecast risk (Chopra and ManMohan 56). There is also a significant category of intellectual property risks which is driven by the vertical integration of the supply chain as well as the global markets and outsourcing. The procurement risks are motivated by risks in the exchange rate, industrywide capacity utilization, procuring key components from only one particular source as well as the long-term vs short-term contracts (Chopra and ManMohan 57). Risks as a result of receivables also exist which depend on the number of customers and the financial strength of these customers. Another category is for inventory risks which are triggered by the rate of obsolescence of a product, the inventory holding costs, product value as well as uncertainty in demand and supply. The last category is that of capacity risks caused by the cost of capacity and the capacity flexibility (Chopra and ManMohan 59).

In the management of these risks, managers need to undertake two key things. The first thing is to create an organizational understanding that needs to be shared throughout the organization regarding the various supply chain risks. The next step is to make a determination on how they are going to adopt general risk mitigation strategies to the companies’ particular circumstances. This can be achieved through stress testing and tailoring of the risk management approaches. Stress testing involves the undertaking of “what if” analysis to understand and prioritize the risks (Chopra and ManMohan 59). Tailoring the risk management approaches involves building various reserves for the management of the risks including capacity, inventory, responsiveness and reserves for redundant suppliers. However, the managers need to consider the tradeoff between the actual risk and what it is likely to cost when building a reserve for the mitigation of such risks (Chopra and ManMohan 60).

Work Cited

Chopra, Sunil, and ManMohan S. Sodhi. "Managing risk to avoid supply-chain breakdown."MIT Sloan management review 46.1 (2004): 53-61.

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