Strategic Sourcing

The risk of supply chain disruptions and other forms of failures, such as sudden price shifts, has and continues to create challenges for firms managing their supply chains. Fortunately, we do not need to reinvent the wheel for managing risk and ensuring supply chain resilience. Many of the approaches and tools used in the strategic sourcing process can also be used to manage risk. This introductory chapter provides the basis and grounding for subsequently identifying various sources of risk, utilizing an array of analytic tools for assessing the significance of risk, and subsequently employing well-established approaches in the strategic sourcing process for managing risk and facilitating supply chain resilience.

Supply chain risk management (SCRM) is a process that aims to assess and mitigate vulnerabilities that can generate negative outcomes such as cost increases, quality issues, or business interruption along the supply chain. These vulnerabilities can stem from the global environment, from the complex relationships with other firms in the supply chain, and from internal operations. One effective and efficient managerial process to cope with these vulnerabilities requires optimizing the Cost of Risk (CoR) indicator, which is a quantitative measurement of losses due to risk and the cost of risk management investments (i.e., risk control and risk financing strategies). Besides SCRM, companies also need to address vulnerabilities building resilient supply chains to recover quickly from unexpected events impacting supply chain performance. The resilience and risk management perspectives work in parallel to ensure supply chain continuity.

Supply risk assessment has become a priority on the agenda of supply chain managers and purchasing departments. Multifarious unforeseen supply chain vulnerabilities and disruptions that have affected organizations in the last decade have caused losses of hundreds of millions of dollars in industries ranging from pharmaceuticals and consumer goods to electronics and automotive. At the heart of all these issues, there is a common challenge, namely the lack of robust processes to manage supply chain risk as the world becomes more interconnected and complex. Effective tools that companies can use to model and manage supply chain risk exist, but are still limited. Borrowing risk assessment models from large companies without adapting to the specific context of the firm may be dangerous because the realities in which companies operate are different. Also, the business environment changes at a very fast rate, thus constantly posing new challenges in managing supply chains. Although there is not a one-fit-all solution to risk assessment, the objective of this chapter is to provide an overview of the main risk assessment tools, as well as their characterization in order to support decision-makers to better manage supply chain risk during the strategic sourcing process.

The decision analysis techniques discussed in the prior chapter provide supply chain professionals insight into their risk exposure in the supply chain. This chapter takes the initial insights from analyzing risk exposure and applies them to determine viable and appropriate approaches for managing risk and ensuring supply chain resilience, starting from the strategic sourcing process.

The strategic sourcing process provides organizations with an outstanding opportunity for assessing and managing potential threats that can result in supply chain disruptions and significant cost increases. A key theme permeating throughout many of the approaches we have discussed concerns the critical role of collaborative relationships and strategic alliances with suppliers that can help firms “get through the hard times” when disruptions and other forms of risk occur. This concluding chapter also touches upon the benefits and threats Industry 4.0 advancements present to assessing and managing risk in modern supply chains.