Analysing risks in supply networks to facilitate outsourcing decisions

Abstract

In an effort to achieve a competitive advantage via cost reductions and improved market responsiveness, organisations are increasingly employing outsourcing as a major component of their supply chain strategies. However, as organisations increase their dependence on the suppliers of outsourced raw materials and components, they become more susceptible to their risk profiles. Supplier risk profiles are comprised of risk events which are associated with the supply network, internal operations, or external factors. Suppliers with a high probability of risk event occurrences can have a substantial impact on an organisation's revenue stream. Thus, it is essential that organisations have the means to analyse the risks associated with a supplier of outsourced materials. This article presents a methodology for analysing risks in supply networks to facilitate outsourcing decisions. The methodology includes the development of a risk profile for a given supplier through the creation of Bayesian networks. The networks are used to analyse a supplier's external, operational and network risk probabilities, and the associated revenue impact on the organisation. The methodology can be used by supply chain professionals to facilitate outsourcing decisions with either current or prospective suppliers.

Keywords:

• outsourcing
• supply networks
• supply chain risks
• risk events
• Bayesian networks