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192 CHAPTER 5 • PuRCHAsing And suPPly sTRATEgy
Categories of purchasing and supply risks

So what are the key purchasing supply chain-related risks? Some fall into the cate-
gory discussed above – major disruptions that become headlines across the world, but
others are less public but still potentially devastating in terms of their consequences.
Table 5.5 offers a helpful starting point for considering these different risk categories
and then, more importantly, deciding what needs to be done to avoid and/or mitigate
their impact.
All these risks identified in Table 5.5 can be managed – not necessarily avoided, but
certainly managed. A firm can always avoid single-source supply arrangements, always
purchase more capacity than necessary, pay to hedge exchange rate and raw material
price risks, never source in countries with weak intellectual property regimes, and so
on. The problem is that the ‘resilient enterprise’ comes at a cost. Yet a firm may be
able to find a strategic option that both reduces risk and increases profit. For example,
when Apple moved in to its digital music delivery model, it could deliver music while
eliminating the need for physical inventory, thus reducing holding costs and increasing
margins. If no such option can be found, the question is often how much is a firm will-
ing or able to pay in order to manage supply-chain risks. Professors Chopra and Sodhi
argue that ‘the manager’s role here is similar to that of a stock portfolio manager: achieve the
highest possible profits for varying levels of risk and do so efficiently’.

Table 5.5 indicative purchasing and supply-related risks

Category of risk Typical drivers of risk
Supply disruptions Natural disaster (e.g volcano)
Industrial dispute (e.g. postal strike)
Supplier bankruptcy
War and terrorism
Supply delays High-capacity utilisation at supply source
Inflexibility of supply source
Poor quality or yield at supply source
International travel (including customs, etc.)
Systems breakdown Upgrading information infrastructure
Web ‘attack’ on e-commerce
Forecast inaccuracy Long lead times, seasonality, product variety, short life cycles, small customer base
‘Bullwhip effect’ caused by sales promotions, incentives, lack of visibility and
demand exaggeration
Loss of intellectual property Global outsourcing/overlapping supply base
Weaker IP enforcement regimes
Procurement problems Exchange rate risk
Raw material price increases
Industry-wide capacity utilisation
Weak contracting capability
Inventory costs Rate of product obsolescence
Inventory holding cost
Demand and supply uncertainty
Source: adapted from Chopra, S. and Sodhi, M.S. (2004) ‘Managing Risk to Avoid Supply-Chain Breakdown’, MIT Sloan
Management Review, Fall, 46(1).

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