This essay examines how organizations can effectively manage risk within supply chain logistical systems by categorizing threats into two types: unknown-unknown risks (natural disasters, geopolitical instability, epidemics, terrorist attacks) and known-unknown risks (execution problems, forecasting inaccuracy, supplier performance, market volatility). For each risk source, the paper identifies specific mitigation strategies, including insurance, redundancy, improved hiring and training, diversified supplier networks, and flexible inventory management. The analysis demonstrates that while some risks remain largely uncontrollable, organizations can enhance competitive advantage by understanding risk categories and implementing targeted management approaches.
Risk is everywhere. The greatest opportunity for any organization rests in its ability to manage risk to its own advantage. The world is not that simple, however, and the mysterious nature of the universe presents unknowable challenges in front of us all as we navigate through our lives and experiences. As Bidgoli (2010) notes, "Managing risk is the number one concern of CEOs and COOs and financial executives in North America and Europe see supply chain disruptions as the second biggest threat to their operations." Success in any endeavor results from mindfully weighing pros and cons to find appropriate solutions that can maximize benefit. The entire journey is a narrow path, but those organizations and individuals who can navigate without fear have an opportunity to make the best of risk.
The purpose of this essay is to discuss how risk management within supply chain logistical systems can be effectively applied. This essay will categorize two sets of risks: unknown-unknown risks and known-unknown risks. Examples will be given to highlight the impact these two categories of risk present to managers who are responsible for managing the supply chains within their respective organizations. Additionally, each source of risk will be accompanied by an appropriate management strategy to mitigate the impact that these risks can have upon an organization's quest to maximize their competitive advantage in a specific industry or market.
Unknown-Unknown (UU) risks are described as being virtually not within any human control. The mysterious nature of these risks puts managers at a disadvantage due to the fear of the unknown. These risks include natural disasters, geopolitical instability, epidemics, and terrorist attacks—each presenting unique challenges that require specific mitigation approaches.
Natural disasters are very dangerous because nature itself is the cause of the problem. Natural disasters include earthquakes, floods, typhoons, mudslides, avalanches, meteor showers, and others. These events are largely unpredictable and present the most serious threat to any and all supply chains that fall within their range of destruction. To mitigate the dangers of natural disasters, flexibility is always a key issue, but insurance policies can accentuate the redundant efforts built within any operational concept designed to lessen the effects of natural disasters. Insurance cannot help with short-term disruptions in the supply chain caused by natural disasters, but in the long term it can be an effective strategy.
The complex nature of geopolitics puts many businesses on the defensive due to the overwhelming lack of control that they may be experiencing. This source of risk to the supply chain contained in geopolitical situations needs to be effectively managed as another UU source of risk. These risks occur in dangerous parts of the world and suggest that business needs to take extra precautions to mitigate these risks. Such actions should include setting up backup plans that can be covered by adjoining areas where the risk is much lower. Since political strife and turmoil can develop rapidly, this mysterious confluence of events requires extra attention from risk managers.
Epidemics have wiped out millions of people in recent history and represent a real and mysterious threat. This source of UU risk can have devastating impacts on businesses if they are not prepared to respond. Epidemics are contagious and need to be contained in order to preserve other valuable resources. Epidemics can occur in humans and animals, causing unique sets of problems. JĂĽttner (2005) observed that "In recent years the widespread disruptions caused by fuel protests, and then by foot and mouth disease in the UK, by terrorist attacks and the threat of weapons of mass destruction in the USA, or by the SARS outbreak in China, Hong Kong and Canada have transformed perceptions of security across supply chains, and have underlined their vulnerability. In our technology-entwined global marketplace, an earthquake in Asia can seriously disrupt business in North America or Europe."
Terrorist attacks are also unpredictable when dealing with supply chain issues. There is little a business can do other than insure its supply chain assets. Supply chains need to be protected against terrorist attacks; however, the nature of each attack is quite different, and to defend oneself against the myriad sources of terrorist attack is quite impossible. Since terrorist attacks are so infrequent, they require little risk management in most situations. In some industries this may be different, however, such as large-scale natural resources shipping routes and supply chains found in the oil industry.
Known-Unknown (KU) sources of risk to the supply chain functioning of any organization are based more on traditional problems of logistics and transport. KU sources of risks are much more controllable, routine, and in some cases typical problems that must be dealt with on a continual basis. These risks stem from operational execution, forecasting, supplier relationships, and market dynamics.
Execution problems are most commonly attributed to human error and misjudgment. People will always make mistakes, and to expect perfection in supply chain management is not realistic in the world we live in. To mitigate the problems associated with execution problems depends on the integration of human resources in the execution. Hiring personnel that can handle the appropriate tasks is an effective approach to this problem. Training sessions and continually improving fundamental skills are also helpful in lessening the impact of execution problems that occur so often.
Logistics relies on the forecasting abilities of supply chain managers. Forecasting is not very accurate in some aspects, however, and usually provides vague guidelines of behavior. Determining exact amounts of supply based on historic demand levels is useful, but statistical inference depends on subjective interpretation by supply chain managers when being utilized. By not depending on forecasts too much and by complementing them with different predictive measures, organizations can help eliminate the confusion and inaccuracy these forecasting reports often provide.
Supplier risk management is a somewhat controllable and therefore knowable source of risk. As Kelly and Lawrence (2010) note, "Supplier risk management is not a new concept; however, the type of risk that can affect the supply chain and the way in which these risks are managed and mitigated has evolved significantly. The need for proactive and predictive management strategies is ever present in business today." Having multiple suppliers is always a useful tactic in managing this type of risk. Keeping suppliers interested in the organization's business also provides the necessary rapport to help avoid problems when suppliers fail.
The volatility in the market is what gives it its energy and focus. Market changes are risky when they approach the realm of the uncontrollable. Supply chains need to have enough inherent flexibility to withstand the common market fluctuations that occur so often. Applying benchmarks and guidelines in organizational strategies that provide certain market indicator ceilings and floors can be useful in setting up an approach to deal with this KU source of risk to a supply chain. Supply chains need to have appropriate inventories to withstand certain delays and problems that can be affected by the fickle tastes of any given industry or market that a risk manager may find themselves working to lessen the dangers of the unknown variables that permeate the business environment.
Risk management in supply chain systems requires understanding the nature of threats and matching mitigation strategies to each risk category. While unknown-unknown risks such as natural disasters and geopolitical events remain largely beyond organizational control, strategies like insurance and geographic redundancy can reduce their impact. Known-unknown risks—rooted in execution, forecasting, supplier relationships, and market dynamics—offer greater opportunity for control through improved hiring, training, supplier diversification, and flexible inventory management. Organizations that recognize these distinctions and develop proactive management approaches can navigate the complexity of modern supply chains and enhance their competitive position in an uncertain business environment.
You’re 97% through this paper. Sign up to read the full paper.
Sign Up Now — Instant Access Already a member? Log inAlways verify citation format against your institution’s current style guide requirements.