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1. CHAPTER ONE
RISK AND RELATED TOPICS
After accomplishment of this chapter, students will be
able to;
 Define the term risk
 Explain supply chain risk
 Explain source of supply chain risk

2. Brainstorming question
Form small group and discuss on the following
point then share your insight to classmate
What is risk?
What is uncertainty in business environment?
What is the relationship between risk and
uncertainty

3. “Life is inherently risky. There is only one big
risk you should avoid at all costs, and that is the
risk of doing nothing.”
-Denis Waitley

4. Meaning of risk
There is no single definition for risk
Different scholar viz. Supply chain analyst,
Economist, Behavioral scientist, risk theorist,
statistician, each of them have their own concept.
But most of them consider the following definition.
Risk; Possibility of unfortunate occurrence
It is combination of hazard
Risk is irregularity; tendency of actual result and
it differ from predicted result.

5. Cont…
• According to the American Academy of Actuaries, the
term risk is used in situations where the probabilities of
possible outcomes are known or can be estimated with
some degree of accuracy,
• whereas uncertainty is used in situations where such
probabilities cannot be estimated.

6. Cont…
• Objective risk refers to the probability of a loss
occurring based on statistical analysis or observations
made on a large amount of historic data.
• On the other hand, subjective risk is uncertainty based
on one's mental condition or state of mind

7. Cont…
• Subjective risk is influenced by personal factors such as,
past experiences, and current situation.
• For example, a child might perceive an icy sidewalk as a
fun thing to slide on, while a old person might perceive it
as a high risk due to their vulnerability to falling and
becoming injured

8. Cont…
• Objective risk is less influenced by personal factors and
can be assessed more objectively using data-driven threat
assessment. For instance, if we can gather enough data to
give us a good understanding of what the threat looks like
(say, the frequency and magnitude of earthquakes in a
particular area), we can then start to assess the
vulnerability and impact and therefore the risk of this kind
of event more objectively

9. supply chain risk
What is supply chain?
Supply chain is the network of organizations that
are linked through upstream and downstream
linkages, in the different processes and activities
that produce value in the form of products and
services in the hands of the ultimate customer.
All entities should share common supply chain
objectives regarding final customers and users.

10. Supply chain risk
Anything that disrupts or impedes the information,
material or product flows from original suppliers to
the delivery of the final product to the ultimate end-
user.
In upstream
The supply chain risk originates from upstream member
enterprises, including potential or actual disturbance in the
flow of raw materials, components, and information in supply
chains

11. Cont…
In downstream
The supply chain risk is originate from
 demand variability
Customer bankruptcy
Therefore, supply chain risk analyst should be
aware of the root causes of risks in their company

12. Risk vs Uncertainty in supply chain
The major concern of supply chain resilience is
to enable continuity of firm's operations in the
presence of uncertainties and disruptions.
Decision-making under uncertainty belongs to
the most important areas of resilient supply chain
management
Risk and uncertainty is inevitable aspect in
business environment and supply chain

13. What is uncertainty?
Uncertainty refers to the degree of incompleteness
of information about future event within the supply
chain.
Uncertainty is viewed by many scholar as a special
case of the risk in which there is insufficient
information, knowledge or understanding to enable
the decision maker to identify all of the potential
outcomes and their consequences or likelihood of
occurrence.

14. Cont…
Supply and demand uncertainty increases pressure on the
supply chain and amplifies the risk of having invested too
much or too little
Therefore, in order to minimize the level of uncertainty in
supply chain member, supply chain managers should
strive to work on visibility of data in the each member.

15. Cont…
Risk in supply chain is anything that disrupts or impedes the
information, material or product flows from original suppliers
to the delivery of the final product to the ultimate end-user.
 Risk is the possibility and effect of mismatch between supply
and demand
The supply chain risk is originates from upstream member
enterprises, including potential or actual disturbance in the
flow of raw materials, components, and information in supply
chains

16. Sources of supply chain risk
 Supply chain risk is originate from both internal and external
environment.
 As a supply chain usually consists of several different
interconnected companies A key feature of supply chain risk is that
it extends beyond the boundaries of the single firm.
the boundary extended flows can become a source of supply chain
risks

17. Major sources of supply chain risk

18. Importance of supply chain risk management
Discuss in pair and reflect your view on whether risk
management is important in business as well as in
supply chain management

19. Importance of supply chain management
Reducing the potential of profit loss by discovering
risks early.
Responding quickly to unexpected situations or
events based on planning and execution.
Providing safeguards to protect companie’s
product’s brand reputation.
Improving customer support and satisfaction.
Creating a blueprint for dealing with unexpected
challenges with reduced delays or expenses.

20. Types of risk in supply chain
External risks; that “deal with threats from an external
perspective of supply chain that can be caused by economical,
sociopolitical or geographical reasons, natural risk.
Examples are natural catastrophes, economic downturn, external
legal issues, corruption, and war.”
Time risks; referring to delays in supply chain processes.
Information risks, e.g., communication breakdown within the
project team, information infrastructure complications, distorted
information, and information leak.

21. Cont…
Financial risks; e.g., inflation, interest rate level, currency fluctuations,
and stakeholder requests.
Supply risks; i.e., risks related to suppliers, e.g., supplier bankruptcy,
price fluctuations, unstable quality, and quantity of inputs.
Operational risks; caused by problems within the organizational
boundaries of a firm, e.g., changes in design and technology, accidents,
and labor disputes.
Demand risks; that refers to demand variability, high market
competition, customer bankruptcy, and customer fragmentation.

22. Cont…
Supply Chain Risks
Process Risks
Production Capacity Breakdowns
• Facility Disruptions
• Logistics Risks
• Strikes
Financial Risks
•
Financial risk
Liquidity Risks
• Financial Crisis
• Credit Risks
Demand Risks
• Price Risks
Demand Fluctuations
• Market Disruptions
Law and Cultural Risks
• Legal Risks
• Cultural Risks
• Trust Risks
c
supply Risks
• Delivery Delays
• Product Quality Risks
• Supplier Disruptions
Information Risks
• Information
Distortion
• Cyber-Attacks
Natural Risks
• Climate Change and Natural
Disasters
• Natural Resource Shortages
• Epidemics/Pandemics

23. Risk, peril and hazard
Peril
Peril is defined as the cause of loss.
Example
If house burns because of a fire, the peril, or cause of loss,
is the fire.
If a car is damaged in a collision with another car, collision
is the peril, or cause of loss.
Common perils that cause loss to property include fire,
lightning, windstorm, earthquake, flood, theft

24. Hazard
A hazard is a condition that increases the frequency or
severity of loss that arising from a given peril. There are four
major types of hazards
Physical hazard
Moral hazard
Attitudinal hazard
Legal hazard

25. Physical Hazard
A physical hazard is a physical condition that
increases the frequency or severity of loss.
Examples of physical hazards include
Icy roads that increase the chance of an auto
accident,
Defective wiring in a building that increases the
chance of fire, and
Defective lock on a door that increases the chance of
theft

26. Moral Hazard
Moral hazard is dishonesty or character defects in an individual that
increase the frequency or severity of loss.
Examples of moral hazard in insurance include
 Faking an accident to collect benefits from an insurer,
 submitting a fraudulent claim,
 Inflating the amount of a claim, and
 Intentionally burning unsold merchandise that is insured.

27. Attitudinal Hazard
Attitudinal hazard is carelessness to a loss, which increases the
frequency or severity of a loss.
Examples of attitudinal hazard include
 Leaving car keys in an unlocked car, which increases the chance of
theft;
 Leaving a door unlocked, which allows a robber to enter;

28. Legal Hazard
Legal hazard refers to characteristics of the legal system or regulatory
environment that increase the frequency or severity of losses due to a
condition imposed by the legal process that forces an insurer to cover
a risk that it would otherwise consider uninsurable
Examples include
 Adverse jury verdicts or large damage awards in liability lawsuits;
 Laws that require insurers to include coverage for certain benefits
in health insurance plans, such as coverage for alcoholism;

29. Classification of Risk
Risk can be classified into several distinct classes.
The most important include the following
Pure and speculative risk
Diversifiable risk and non diversifiable risk
Enterprise risk
Systemic risk

30. Pure Risk and Speculative Risk
• Pure risk is defined as a situation in which there are only
the possibilities of loss or no loss. The only possible
outcomes are adverse (loss) and neutral (no loss).
For example, natural disasters, fires, or death are situations
where pure risk is generally prevalent.
• These situations cannot be predicted and are beyond
anyone's control.

31. Speculative risk
• Speculative risk is a type of risk that involves the
possibility of both gain and loss.
• It is taken on voluntarily, in the hope of achieving
a profit. Speculative risks are often associated
with financial investments, but they can also be
found in other areas of life, such as starting a
business or gambling.

32. Cont..
For example,
 If you purchase 100 shares of common stock, you would profit if
the price of the stock increases but would lose if the price declines.
Investing in real estate, and going into business for yourself. In these
situations, both profit and loss are possible.

33. Cont…
1. Entrepreneurship: Starting a new business involves speculative
risk. While there is the potential for the business to succeed and
generate profits, there is also a risk of failure and financial loss.
2. Commodity Trading: Trading commodities like oil, gold, or
agricultural products can lead to both profits and losses. Prices can
fluctuate due to various factors, including supply and demand,
geopolitical events, and economic conditions.
3. Sports Betting: Betting on the outcome of sporting events is
speculative in nature. Participants can either win their bets and
make a profit or lose their stakes.

34. Diversifiable Risk and Non-diversifiable Risk
• Diversifiable risk and non-diversifiable risk are two
categories of risk that investors and financial analysts often
consider when assessing the risk associated with
investments or portfolios.
Diversifiable Risk
• Diversifiable is the risk that is specific to a particular
company, industry, or asset. It is risk that can be reduced or
eliminated through diversification, which involves
spreading investments across different assets or securities.

35. Cont…
• Diversifiable risk is a risk that affects only individuals or small
groups and not the entire economy
• Example: If you invest all your money in a single company's stock,
you are exposed to the specific risks associated with that company.
For instance, if the company's earnings decline due to poor
management decisions, your investment will likely suffer.
• However, if you diversify your portfolio by investing in multiple
companies across different industries, the impact of a poor-
performing stock may be offset by the better performance of other
holdings.

36. Non diversifiable risk
• Non-diversifiable or systematic risk or fundamental risk is
a risk that affects the entire economy or large numbers of
persons or groups within the economy. It is a risk that
cannot be eliminated or reduced by diversification.
• Examples include rapid inflation, cyclical unemployment,
war, hurricanes, floods, and earthquakes Political events,
and global economic trends. It is beyond the control of
individual companies or investors.

37. Cont…
• Social insurance and government insurance programs, as
well as government guarantees or subsidies, may be
necessary to insure certain non-diversifiable risks

38. Enterprise Risk
• Enterprise risk is a term that encompasses all major risks faced by
a business firm. Such risks include pure risk, speculative risk,
strategic risk, operational risk, and financial risk.
• Strategic risk refers to uncertainty regarding the firm’s financial
goals and objectives; for example, if a firm enters a new line of
business, the line may be unprofitable.
• Operational risk results from the firm’s business operations. For
example, a bank that offers online banking services may incur
losses if “hackers” break into the bank’s computer.

39. Major commercial and personal risk
Personal Risks
• Personal risks are risks that directly affect an individual or family.
They involve the possibility of the loss or reduction of earned
income, extra expenses, and the depletion of financial assets.
Major personal risks that can cause great economic insecurity include
the following:
• Premature death
• Insufficient income during retirement
• Poor health
• Unemployment

40. Commercial risk
• Business firms also face a wide variety of pure
risks that can financially cripple or bankrupt the
firm if a loss occurs.
• These risks include
property risks,
liability risks,
loss of business income, and other related risks