Organizations face numerous challenges which must be skillfully addressed in order to achieve the desired success. Their risk exposures are based on several factors such as: size, the nature of the organization, the industry affiliation, and global footprint, among others.
Classifying Supply Chain Risks
Risks can be classified in several ways. One of such classifications comprise of 4 elements: (1) Strategic risks such as threat of new entrants who could become competitors or threats due to new technology; (2) Financial risks such as those resulting from tariffs or exchange rate fluctuations; (3) Hazard risks such as pandemics or natural disasters, including tornados and earthquakes; and (4) Operations risks such as those arising from poor product quality from suppliers, system disablement from computer virus/hacking, or demand/supply risk due to inadequate demand/supply.
Since all organizations are part of supply chains, their risks are often propagated through multiple organizations. For example, when a customer faces financial distress or becomes bankrupt, this affects its suppliers. This was the case when General Motors and Chrysler (now Stellantis) were at the brink of bankruptcy during the 2008-2009 global financial crisis. Many suppliers experienced the same fate since they depended largely on these 2 automotive behemoths. Fortunately, the United States (US) Government rescued General Motors and Chrysler through major restructuring initiatives that were enabled by then US President Barack Obama’s Administration, as discussed in The Auto Bailout 10 Years Later: Was It the Right Call? – Knowledge at Wharton.
Risk management has always been important to executives and managers. However, it is safe to say that it has recently become even more important. For example, consider the fact that many firms are yet to fully recover from the devastation caused by the COVID-19 pandemic. There is also the changing business landscape brought about by Artificial Intelligence (AI) and active wars across the globe such as the Russia-Ukraine war and the United States-Iran war. Furthermore, there are other tension spots around the world that have the potential of resulting in wars. Added to these challenges are natural disasters over which we have no control.
In the remaining part of this article, I will briefly share some of my thoughts on actions we need to take under the prevailing circumstances. They are based on my more than 25 years of experience teaching supply chain management (SCM); conducting research on many SCM topics—including supply chain risk management; participation in Harvard Business School’s webinars, some of which relate to this topic; my direct interactions with company executives; as well as my own industry work experience.
Risks Typically Have Extensive and Significant Impacts
The intercontinental and extensive structure of organizations’ supply chains, which has major impacts on risks and how they should be effectively managed, is often underestimated by executives. Let us examine the following example to buttress my point. The ongoing war between the US and Iran has led to closure of the Strait of Hormuz, the pathway for a significant proportion of oil used around the world. Specifically, about 20% of global oil and Liquified Natural Gas (LNG) needs and 30% of global fertilizer needs go through this route, illustrating why the Strait of Hormuz matters to global trade and energy markets. CBS News recently reported related developments in the Red Sea area of the Middle East, including global oil prices reaching $100 a barrel amid attacks in the Red Sea.
The resulting increase in global oil prices has a snowball effect on all sectors of the world economy, both in direct and indirect ways. Aside from refined petroleum which powers cars and trucks, crude oil byproducts are essential inputs for many manufactured items; including plastics, which are component parts of many industrial products such as automobiles and robots. In fact, over 6,000 products that people use daily—including bags, shoes, tires, and some clothing—are made from byproducts of crude oil, as illustrated by the U.S. Department of Energy’s resource on products made from oil and natural gas.
Furthermore, since transportation is a key supply chain process, increased fuel prices lead to increases in prices of most products on store shelves, as well as cost of operations for businesses, including restaurants and hair salons. Similarly, a blockage caused by a 1,312-foot-long boat in the Suez Canal (nestled between Egypt and Saudi Arabia) for about 7 days in April 2021 led to an estimated loss of $10 billion in global business, demonstrating the global economic impact of the Suez Canal blockage. This is because about 12% of global trade goes through the Suez Canal every day.
What Should We Do?
What are some key things executives and managers should do?
(1) Understand Your Supply Chain
Oftentimes, we limit our interactions and knowledge to our immediate partners such as direct suppliers or customers. Clearly, this is inadequate when seeking to manage risks effectively as the source of the risk may not be from the immediate partners. Let us consider, for instance, poor quality product from an automotive Original Equipment Manufacturer (OEM). While the processes of the OEM and its direct suppliers may be functioning well, the real quality problem may be from a Tier 2 or Tier 3 supplier. Clear documentation of the suppliers’ processes at multiple tiers facilitates traceability.
Also, it is noteworthy that while consolidation within supply chains has several benefits, it can also pose traceability challenges as demonstrated in the July 2026 outbreak of the Cyclospora parasite in the US that is linked to iceberg lettuce. The incident illustrates the risks associated with a consolidated food supply.
(2) Identify, Understand, and Manage Your Risks
One traditional way of managing risks is by assessing their associated vulnerabilities. This involves estimating both the likelihood of occurrence of an event and its impact—including financial impact—on the organization. The highest vulnerability risks are those that are most likely to occur and that have very severe impact on the organization. This information for the various risks is used to prioritize causes of action.
More recent research by Massachusetts Institute of Technology’s (MIT’s) Dr. Simchi-Levi indicates that the above approach may be inadequate in some cases. Thus, he has introduced the concepts of Risk Exposure Index (REI) and Time to Recovery (TtR) for nodes in the supply chain. MIT provides additional information on the Risk Exposure Index and its application to supply chain risk.
Outsourcing is a way firms use to reduce their direct risk exposure. However, Delta Airlines is currently reaping the benefits of the opposite—vertical integration (owning its own refinery)—during this period of the US-Iran war, where there is significant increase in the price of aviation fuel. The Wall Street Journal examines Delta’s refinery strategy amid surging jet fuel costs. Also, circumstances may require having some excess capacity as a way to manage risks (build resilience) even though it may be more costly in the short term.
(3) Diversify Your Operations
This is basically in line with the adage: “Do not put all your eggs in one basket”. Diverse portfolios are generally known to do better. Diversification can be a combination of various forms: Business diversification could mean serving clients in multiple industries; Spatial diversification could mean having operations in different regions or countries; and Partner diversification could mean having multiple suppliers for a given product or part.
(4) Invest in Your Personnel and in Appropriate Technology
Technology can be leveraged to assess, forecast, and analyze a firm’s risk exposure by incorporating information from its supply chain. AI is beginning to play a crucial role in this regard. The human element is no less important as the combination of human intelligence and AI has the potential to accomplish more than either one can do by itself. Therefore, companies should not only invest in technology but they should invest in training their employees adequately.