A Model for Proactive Supply Chain Risk Management

Increasingly, companies need to be vigilant with the risks that could harm the short-term operations as well as the long-term sustainability of their supply chain. A wide variety of risks could disturb a supply chain from its smooth operations, ranging from material shortages, delayed transportation, unexpected declining in demand, supplier bankruptcy, natural disaster, terrorist attack, etc. With the increasing complexity of supply chain configurations as a result of companies involving more partners in their operations through outsourcing and other contract schemes, the supply chains are more exposed to risks, and hence it is imperative for them to have an effective management of supply chain risks. In this paper, we present a model for risk assessment and mitigation. We modified the well known FMEA model for risk assessment and adapt the House of Quality model for determining which risk agents are to be prioritized and then for selecting a set of cost-effective mitigation actions. In the model, each risk event is associated with a value of severity and each risk agent will have a probability of occurrence. The correlation of each risk agent and each risk event is determined. We defined aggregate risk potential for each risk agent as a measure of risks caused by a risk agent. The model is applied to a large fertilizer company in East Java, Indonesia.