The risk management has become a particularly important aspect in sustainable supply chain management as increased sustainability requirements have broadened the definition of the traditional supply chain. In the significantly changing business environment, the traditional way to manage the supply chains no longer work and old supply chain models no longer serve the present need. (Christopher and Gaudenzi 2015, 58) Moreover, increased outsourcing and offshoring has increased supply chain vulnerability, exposing companies to higher level of risk.
(Trkman and McCormack, 2009; Song, Ming, Liu 2017, 100) Many businesses are expanding their operations to reduce operating costs, but while doing so, they expose themselves to risks happening far away in their supply chain. The reputation and image of companies can be at stake due to suppliers who do not adhere to the principles of sustainability in their own operations. Risk factors can also be a natural disaster on the other side of the globe, which can jeopardize the business of the focal company. (Ellis et al., 2011; Rostamzadeh, Ghorabaee, Govindan, Esmaeili, Nobar 2018, 652) Systematic, well-designed risk management not only benefits the focal company, but also brings opportunities for all parties in the chain by providing competitive advantage and sustainable benefits (Teuscher, Grüninger, Fernidand 2006; Morali, Searcy 2012, 638). The essence of risk oriented SSCM is the partnership between supply chain organizations, which enables the reduction of risks inherent in the nature of the supply chain (Teuscher et al. 2006, 3). In fact, it is argued that an organization that ignores risk management while pursuing efficiency is doomed to failure eventually (Dong and Cooper, 2016;
Fan et al., 2016; Rostamzadeh et al. 2018, 652) Long-term strategic and business benefits in mind, the elimination of risk and managing them in the supply chain is vital in order to materialize sustainability throughout the chain.
One of the most common ways to carry out risk assessment is to use a risk map/
matrix, which is used to assess the likelihood and consequences of risk occurrence to the supply chain performance. The company should focus on risks which are comparable and quantifiable so that risks can be prioritized based on their impact on the supply chain vulnerability (Blackhurst et al. 2008; Vilko & Hallikas 2012, 587).
However, the focus should not be solely on financial consequences i.e. tangible, quantifiable assets. Other issues to be considered are, for example, credibility, reputation, status, authority and trust can be damaged if a risk is realised (Harland et al. 2003, 54). Different scales and charts can be used in risk assessment and Table 3 and 4 present the five-class scale which are used to assess the consequence and probability of the risk.
Table 3. Impact assessment scale (adopted from Hallikas et al. 2004)
Table 4. Probability assessment scale (adopted from Hallikas et al. 2004)
Assessing risk is a complicated process and the risk of one company is not necessarily a risk to another company. Hence, the assessment is subjective and should be done from the company’s own point of view. (Hallikas, Karvonen, Pulkkinen, Virolainen & Tuominen 2004, 53)
Supply chain risk management (SCRM) is a preventive and proactive way of managing risks to avoid any unfavourable situations or to minimize the risk.
Moreover, the aim of the process is to determine, implement and monitor measures to avoid, defer, reduce or transfer all relevant risks. (Hofmann et al. 2014, 162) Supply chains can vary greatly in size and nature, but they should be able to react quickly to external and internal risk incidents and at the same time be profitable and productive. Hence, companies should seek solutions where supply chains are flexible to unpredicted disastrous matters (Rostamzadeh 2018, 652) and resilient enough to respond to events as they happen. (Christopher & Gaudenzi 2015, 71) SCRM is a collaboration of supply chain partners which is carried out with the risk management tools and practices. (Norrman & Jansson 2004, 436) The risk management tool itself does not guarantee that all potential risks can be detected or that consequences can be properly resolved, but it standardize risk management of the organization and supports it with risk events. For the risk management to function smoothly, knowledge, abilities, experiences and skills are needed. (Wu &
Blackhurst 2009) Risk management may deal with risks for a single company, but generally risk management considers at least two supply chain organizations (buyer and supplier) or, preferably, a supply chain of three or more companies, i.e.
the buyer and the first tire and the second tire supplier.
A variety of supply chain risk management tools are used to evaluate and distinguish different supply chain risks while operating at the same time cost-effectively. In academic field, there has been introduced various risk management frameworks using different terminologies. Even if there is no agreement on the definition of SCRM, there is a consensus of the main stages involved in supply chain risk management which are risk identification, assessment, analysis, treatment, and monitoring (Giannakis & Papadopoulos 2016,456). Managing sustainability-related risks follows the same principles and logic as managing typical supply chain risks. The objectives of the risk management frameworks, however, differ depending on whether the target is a typical supply chain risk or a sustainability-related. Risk management strategies that focus on the most common problems in the supply chain tend to harmonize supply chain and reduce complexity, lead times, minimize costs and optimising operational efficiency. In turn, by addressing sustainability-related risks, the goal is to avoid negative
consequences for the company's reputation and image or shareholder value.
(Anderson 2005; Giannakis & Papadopoulos 2016, 458)
Anderson (2006, 70) perceive that the objectives of sustainability risk management are cost-oriented which enables the company to reduce risk-related costs.
Companies that have managed to reduce their sustainability risks, such as the amount of waste and pollution, have also reduced the cost of waste treatment. For example, by reducing pollutants and greenhouse gas emissions from diesel, Fedex managed to reduce the risk of reputation, boycott and regulatory risk. However, the primary purpose of sustainability risk management is not aimed at managing and minimize costs, but also to create value, which can improve the supply chain’s sustainability (Giannakis & Papadopoulos, 2016; (Valinejad & Rahmani 2018, 56).
Irrespective of the distinctive nature and of sustainability-related risks, their management process should be included in the company’s overall risk management strategy, as the sustainability risk can be a forerunner for a typical supply chain risk, for example, an environmental disaster may cause a risk of delivery difficulties (Pullman et al. 2009; Giannakis & Papadopoulos 2016, 458).
Effective identification and management of sustainability risks in the supply chain leads to effective resource allocation, which enhances supply chain sustainability.
(Valinejad & Rahmani 2018, 55)