On uncertainty in supply chain risk management

• Pages: 3-19
• Published date: 06 May 2014
• Date: 06 May 2014
• DOI: https://doi.org/10.1108/IJLM-10-2012-0126
• Author: Jyri Vilko,Paavo Ritala,Jan Edelmann
• Subject Matter: Management science & operations,Logistics

On uncertainty in supply

chain risk management

Jyri Vilko, Paavo Ritala and Jan Edelmann

School of Business, Lappeenranta University of Technology,

Lappeenranta, Finland

Abstract

Purpose – The concept of uncertainty is a relevant yet little understood area within supply chain risk

management. Risk is often associated with uncertainty, but in reality uncertainty is a much more

elaborate concept and deserves more in-depth scrutiny.To bridge this gap, the purpose of this paper is

to propose a conceptual framework for assessing the levels and nature of uncertainty in this context.

Design/methodology/approach – The aim of the study is to link established theories of uncertainty

to the management of risk in supply chains, to gain a holistic understanding of its levels and nature.

The proposed conceptual model concerns the role of certainty and uncertainty in this context.

Illustrative examples show the applicability of the model.

Findings – The study describes in detail a way of analysing the levels and nature of uncertainty in

supply chains. Such analysis could provide cr ucial information enabling more efficient and effective

implementation of supply chain risk management.

Practical implications – The study enhances understanding of the nature of the uncertainties

faced in supply chains. Thus it should be possible to improve existing measures and analyses of risk,

which could increase the efficiency and effectiveness of supply chain and logistics management.

Originality/value – The proposed conceptual framework of uncertainty types in the supply chain

context is novel, and therefore could enhance understanding of uncertainty and risk in supply and

logistics management and make it easier to categorise, as well as initiate further research in the field.

Keywords Uncertainty, Risk, Supply chain risk management, Conceptual framework

Paper type Conce ptual paper

1. Introduction

Complexity, specialisation, and disintegration are emerging as major challenges in

terms of risk management in supply chains, having made them vulnerable to disturbances

from both inside and outside the system. Indeed, many recent events have shown how

vulnerable long and complex supply chains are. Such events include the well-known

melamine crisis in Chinese dairy products, and other food crises; major natural disasters

including floods, tsunamis, and earthquakes; industrial and societal disputes across the

globe, as well as firm and supply chain-specific glitches and disturbances (Hendr icks and

Singhal, 2003; Chopra and Sodhi, 2004; Sheffi, 2005; Narasimhan and Talluri, 2009).

This vulnerability has attracted the attention of many academics in the field of logistics

and supply management, in which risk-related issues are increasingly taken into account

(Minahan, 2005; Kleindorfer and Saad, 2005; Sanchez-Rodrigues et al., 2008, 2010; Wagner

and Neshat, 2010; Ghagde et al., 2012). In this context, the quality and competitiveness

of individual companies’ operations depend on their ability to identify and mitigate the

uncertainties and risks they encounter. However, although awareness of vulnerability and

of risk management is increasing among academics and practitioners, many related

concepts are still in their infancy. There are thus insufficient conceptual frameworks and

The current issue and full text archive of this journal is available at

www.emeraldinsight.com/0957-4093.htm

Received 31 October 2012

Revised 2 April 2013

2 September 2013

Accepted 27 September 2013

The International Journal of Logistics

Management

Vol.25 No. 1, 2014

pp. 3-19

rEmeraldGroup Publishing Limited

0957-4093

DOI 10.1108/IJLM-10-2012-0126

This paper is based on a paper presented at the 17th International Symposium on Logistics

(www.isl21.net) held in July 2012 in Cape Town, South Africa.

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On uncertainty

in supply chain

risk management

empirical findings to provide a clear picture of the phenomenon of supply chain

risk management (Ju

¨ttner, 2005; Manuj and Mentzer, 2008). Accordingly, both

academic research and practitioner reports stress its importance as well as the need to

develop different approaches (Blos et al., 2009; Manuj and Mentzer, 2008; Shaer and

Goedhart, 2009).

In line with the above-mentioned developments, the role of supply chain risk

management has recently been increasingly emph asised. Indeed, Ju

¨(2005) found that

44 per cent of organisations expected their vulnerabilities to increase within the

next five years. More recently, the need for risk management has become evident

following Snell’s (2010) study showing that 90 per cent of the respondent companies

feared supply risks, whereas only 60 p er cent felt confident or knowledgeable enough

to cope with them. In addition, Hendricks and Singhal (2005) found ou t that firms that

experience supply chain disruptions experien ce on average 40 per cent stock retur ns.

Thus, it is not surprising that there is a growing interest in supply chain-related

decisions and the uncertainty and risk involved (Prater, 2005; Swink and Zsidisin,

2006; Craighead et al., 2007; Hendricks et al., 2009; Hult et al., 2010). In fact, it has

traditionally been assumed that supply side risk is similar to or equivalent to demand

side risk (Christopher and Peck, 2004). However, it has been suggested that supply-side

risks and uncertainty are much more complex issues than demand-side ones, and that,

therefore, managing them needs more careful attention (se e Snyder and Shen, 2006).

Supply chain risk management concerns risk as a situation entailing exposure

to two essential components: an event and the uncertainty concerning the p ossible

outcomes (Holton, 2004; Sheffi, 2005). Thus, risk assessment is based on the likelihood

of the occurrence of the risk situation, and on the kind of damage it might entail if

realised (Mitchell, 1995). The different types of risk are extensively covered in the

relevant literature (Rao and Goldsby, 2009), but analysis of the concept of risk itself is

very limited. For instance, the management of risk is commonly discussed in terms of

vulnerability and uncertainty (Sorensen, 2005), meaning that the conce pt is understood

as an occurrence for which the probability distribution is known. However, we suggest

that in reality, it is much more common that the probability distributions cannot

be defined. Thus, in order to enhance understanding of how risks could be better

managed under such conditions, we put forward a conceptual fr amework focused on

the role of uncertainty in supply chain risk management.

Supporting our argument and illustrating the research gap, some authors have

criticised the fact that the literature on supply chain risk management does not always

clearly distinguish between risk and uncertainty, which makes the definitions quite

vague (Tang and Nurmaya Musa, 2010). Further, it has been suggested that merely

recognising uncertainty is not enough, but researchers and practitioners need more

rigorous frameworks breaking uncertainty down into more detai led elements (Prater,

2005). Indeed, earlier studies have reported that the concepts of risk and uncertainty

are less understood and developed in this context than in other disciplines (Khan and

Burnes, 2007). Given that the two concepts are among the most essential in supply

chain risk management, clarity is of the essence. The aim in this paper, therefore,

is to enhance understanding of these concepts by illustrating the levels of uncertainty

in supply chain risk management. In so doing, we hope to define the nature of

uncertainty so as to facilitate a more comprehensive and valuable consideration of how

the concept should be approached in future studies in the field.

In the next section, we introduce the theoretical background of supply chain risk

management and uncertainty. We then develop our conceptual model of different types

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