Managing risk in global supply chains

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While globalization has enabled firms to become highly cost efficient, it has also exposed firms to increasing risk. Recently, the risks associated with managing global supply chains have become a significant issue for firms. Global supply chains are more exposed to “disruptions” caused by extreme weather and geo-political problems in distant parts of the world. Customers are also increasingly holding global brands responsible for the actions of far-flung suppliers. Firms also face “quality risks” from contaminated inputs or other problems that can, for example, lead to costly product recalls. While some firms may respond to increasing risk by turning away from global sourcing, the benefits of global sourcing is likely to persist in the foreseeable future. To deal with increasing risk, firms will therefore need to rethink how they manage supply chains. The long-term objective of the proposed research is to improve the ability of Canadian and global firms to mitigate and manage the risks facing their global supply chains by: (1) developing new supply chain models to help firms and researchers understand the potential impact of new and emerging risks facing global supply chains; (2) using these models to analytically evaluate the impact of alternative risk mitigation and risk management approaches; and (3) proposing new risk mitigation and risk management methods that firms can implement. Within this broad objective, this proposal will focus on three themes: (1) the alignment of risk management incentives across the supply chain; (2) an integrated approach to risk management by considering financial and other risk mitigation tools in addition to traditional operational approaches; (3) studying the role of government policy in supply chain risk mitigation. Along with co-authors and students, some projects that form part of this research agenda have already been started. The first project is on managing reputational risk in supply chains. Specifically, how should firms devise contracts that incentivize suppliers to not just minimize cost but to do it in a way that minimizes any reputational risk? The second project is on the role of insurance in supply chain risk management. How effective are insurance policies in protecting firms against risks such as product recalls? How will the purchase of insurance affect the decisions of firms and suppliers? The third project is on the role of government regulation in managing and mitigating supply chain risk. How should private firms and government agencies coordinate their actions to achieve an outcome that is beneficial to the firm and to society at large? The primary methodological approaches used in this research will be operations research, game theory, economic modeling and contract theory. However, given the interdisciplinary nature of this topic, tools from economics, finance, and other business disciplines will also be used.